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This is the third most often question asked of me by clients, right behind, “Will I win?” and, “How much is this going to cost?” In most cases, the answer is no. Sometimes, the answer is an equally frustrating, “It depends.”

What do you mean, it depends? Depends on what? The other person harmed me!  I didn’t do anything to deserve it. I shouldn’t have to pay a lawyer to prove that I’m right. Doesn’t the law protect innocent people?

The general rule in North Carolina is that parties in civil cases pay their own attorney’s fees, regardless of who prevails at trial, unless a statute provides otherwise. The statutory exceptions to this general include the following types of claims, which authorize a party to request an award of attorneys’ fees:

Claims arising from personal injury or property damage, where the plaintiff recovers $10,000 or less and there was an unwarranted refusal by the insurance company to pay the claim.  (N.C.G.S. § 6-21.1)

Claims arising under a “note, conditional sale contract or other evidence of indebtedness.”  (N.C.G.S. § 6-21.2).  This covers traditional promissory notes, lease agreements, etc.  Note, however, that the amount of recoverable attorney’s fees is limited to 15% of the “outstanding balance” owed.

Claims arising under the North Carolina Unfair and Deceptive Trade Practice statutes.  (N.C.G.S. § 75-1.1, et seq.)

Claims brought by the other party that are found to be “nonjusticiable” (i.e., frivolous claims that involved “a complete absence of a justiciable issue of either law or fact”).  (N.C.G.S. § 6-21.5);

Claims arising from personal property or real property liens under Chapter 44A of the General Statutes.

Most business contracts contain some form of an attorney’s fee provision, which generally provides that, in the event either party breaches the terms of the agreement and the dispute is litigated or arbitrated, the losing party must pay the winning party’s attorney’s fees. Historically, North Carolina courts have refused to enforce these types of provisions.

That has now changed.

On June 27, 2011, North Carolina passed N.C.G.S. § 6-21.6, which expressly authorizes a prevailing party to recover reasonable attorney’s fees and expenses based on a reciprocal attorneys’ fee provision in a business contract. The law became effective on October 1, 2011, and applies to all business contracts executed on or after that date. Under the new law, a Court or arbitrator may award attorneys’ fees and expenses based on a contractual fee provision if:

1. the provision is reciprocal;
2. the provision is contained in a business contract; and
3. all parties to the contract sign it by hand.

Requirement of a reciprocal provision.
By its terms, the new statute only applies to attorneys’ fee provisions that are reciprocal, meaning that the provision is “applicable to all parties.”  § 6-21.6(a)(4). Provisions that authorize only one party to recover its fees will, therefore, remain unenforceable.

Requirement of a business contract.
The new statute also only applies to reciprocal attorneys’ fee provisions in “business contracts,” defined as, “[a] contract entered into primarily for business or commercial purposes.” Business contracts do not include (i) consumer contracts (entered into primarily for personal, family or household purposes), (ii) employment contracts (including traditional employer/employee contracts, as well as principal-independent contractor agreements); or (iii) contracts to which a North Carolina government or governmental agency is a party.

Method of signature execution.
For a reciprocal fee provision to be enforceable, each of the parties must have signed the business contract “by hand.” It is doubtful that electronic signatures, signature stamps or the like are sufficient to satisfy this requirement. Traditional, “ink” signatures should be used to ensure compliance with the execution requirement.

The amount awarded.
In determining the appropriate amount of attorneys’ fees and expenses to award a party, a court or arbitrator is required to consider 13 factors:

1. The amount in controversy and the results obtained.
2. The reasonableness of the time and labor expended, and the billing rates charged, by the attorneys.
3. The novelty and difficulty of the questions raised in the action.
4. The skill required to perform properly the legal services rendered.
5. 5. The relative economic circumstances of the parties.
6. 6. Settlement offers made prior to the institution of the action.
7. Offers of judgment pursuant to Rule 68 of the North Carolina Rules of Civil Procedure and whether judgment finally obtained was more favorable than such offers.
8. Whether a party unjustly exercised superior economic bargaining power in the conduct of the action.
9. The timing of settlement offers.
10. The amounts of settlement offers as compared to the verdict.
11. The extent to which the party seeking attorneys’ fees prevailed in the action.
12. The amount of attorneys’ fees awarded in similar cases.
13. The terms of the business contract.

Finally, although there is no statutory limit to the amount of attorneys’ fees and expenses that may be recovered in a particular case, the amount cannot be greater than the monetary damages actually recovered by the prevailing party on its underlying claims.

An Ounce of Prevention

Businesses would be wise to proactively take a second look at their existing contracts and take appropriate steps to revise them if necessary to comply with N.C. Gen. Stat. § 6-21.6. Doing so not only protects a business in the event of future litigation, but also provides leverage in favorably resolving potential disputes as they occur and prior to litigation.