Can You Recover Legal Fees In A Business Lawsuit Without A Contractual Provision?

Understanding the American Rule and When Fee-Shifting Is Actually Permitted Under New Jersey Law

Can You Recover Legal Fees In A Business Lawsuit Without A Contractual Provision?

One common misconception in business litigation is that winning a case guarantees reimbursement of attorney’s fees. Many clients believe that being “right” entitles them to recover these costs. Unfortunately, this is not the case. In New Jersey, the rule is straightforward: each party pays its own legal fees, regardless of the trial outcome.

This is known as the American Rule. It applies broadly in civil litigation unless an exception is present due to a contract, statute, or court rule. While there are circumstances where legal fees may be recovered, these situations are rare and not well understood. Clients who expect automatic reimbursement often face disappointment.

The Default: The American Rule

New Jersey courts adhere to the American Rule. This principle asserts that each party is responsible for their legal fees, barring specific exceptions. These fees cover various expenses, including litigation counsel, expert witnesses, and trial preparation. This rule exists to protect legitimate claims and defenses from being hindered by the potential financial burden of litigation costs.

New Jersey courts consistently enforce this principle. They typically refuse to award attorney’s fees to the winning party unless a specific law or rule provides for it. Therefore, even a business that wins in court often bears its own legal expenses unless it can reference a valid reason for fee recovery.

When Fee-Shifting Is Permitted

There are a few exceptions to the American Rule that can allow for fee-shifting. These generally fall under three broad categories: contractual provisions, statutory authorizations, and sanctionable conduct during litigation.

1. Contractual Fee-Shifting Provisions

A common basis for recovering attorney’s fees arises from a written contract containing a fee-shifting clause. Such clauses specify that, in the event of a dispute, the prevailing party can recover reasonable attorney’s fees and costs.

New Jersey courts actively enforce these contractual fee provisions, as long as the language is clear. These clauses can apply to breach of contract claims. In certain situations, they may also extend to related tort claims if the contract language is sufficiently broad.

For instance, a clause stating that “the prevailing party shall be entitled to recover attorney’s fees” covers not only breach of contract claims but could extend to fraud claims arising from the same agreement.

Without a written contract or if the contract remains silent on fees, the parties must rely on statutory or equitable remedies, which are considerably limited.

2. Statutory Fee-Shifting

Several New Jersey statutes allow for fee-shifting under specific circumstances. These statutes aim to encourage certain types of litigation or protect vulnerable parties. Some examples include:

• Consumer Fraud Act (N.J.S.A. 56:8-19): Allows prevailing plaintiffs to recover attorney’s fees in deceptive business practice cases.

• New Jersey Law Against Discrimination (N.J.S.A. 10:5-27.1): Enables recovery of attorney’s fees by prevailing parties in discrimination claims.

• Franchise Practices Act (N.J.S.A. 56:10-10): Grants prevailing franchisees the right to recover legal fees when suing franchisors.

• CEPA (Conscientious Employee Protection Act): Contains a fee-shifting provision for prevailing whistleblower plaintiffs.

  
  

These statutes generally do not apply to standard breach of contract disputes or internal disagreements between business partners. The courts interpret these laws narrowly and do not provide fee recovery by analogy. If a lawsuit does not fit clearly within one of these statutes, the fee provision fails.

3. Court-Ordered Sanctions for Bad Faith

In rare instances, a court may award attorney’s fees as a sanction for bad faith behavior or frivolous litigation. Such actions include filing groundless claims, not complying with discovery orders, or engaging in misconduct during the litigation.

New Jersey Court Rule 1:4-8 and N.J.S.A. 2A:15-59.1 empower courts to impose fees against parties pursuing frivolous claims or defenses. However, these sanctions do not occur merely because one party loses. They necessitate evidence of objective unreasonableness or bad faith, and courts apply these standards cautiously.

In business cases, fee sanctions typically arise from repeated misconduct, litigation abuse, or court order violations—not merely ordinary disagreements over contract terms.

Fee-Shifting in Settlement Negotiations

When fee-shifting isn't guaranteed, the potential to recover or avoid legal fees becomes a negotiation tool during settlement discussions. A party confident in their entitlements to attorney’s fees might demand a larger settlement, aware that ongoing litigation increases the opponent's risk exposure.

Alternatively, a party facing a fee-shifting statute may opt to settle early to mitigate escalating costs. For example, a business accused of consumer fraud may choose to resolve the issue to prevent additional compensatory and statutory fee liabilities.

However, when no fee-shifting provision or statute applies, parties must approach their expectations realistically. The majority of litigants in New Jersey will ultimately bear their own fees, win or lose. It's essential that settlement expectations reflect this reality.

Why Legal Counsel Should Review Fee Language at the Outset

The critical question in any business dispute is whether a valid fee-shifting mechanism exists. To determine this, all contracts, relevant statutes, and procedural histories must be thoroughly reviewed. Too often, clients believe they can recover fees, only to learn after the trial that their victory came with steep, unrecoverable costs.

Businesses must ensure that significant contracts include explicit and enforceable fee provisions, particularly in vendor agreements, service contracts, partnership agreements, and customer terms of service. Waiting for a dispute to arise to consider fee-shifting language can be too late.

Conclusion: Do Not Assume You Will Recover Your Legal Fees

In New Jersey business litigation, there is no default right to recover attorney’s fees. Unless a valid contractual provision, specific statute, or court rule applies, each party must manage their costs. This fundamental principle, known as the American Rule, is crucial to understand. Failure to grasp this can lead to disappointment and miscalculated risks.

Businesses approaching litigation should have a clear understanding of their financial exposure regarding legal fees and expenses. When fee shifting becomes available, it must be proactively invoked with solid evidence. Without it, clients must prepare to bear their attorney’s fees, regardless of their victory in court.

For more information about fee-shifting in New Jersey litigation or to schedule a consultation, please contact the Law Offices of Peter J. Lamont at www.pjlesq.com, call 201-904-2211, or email info@pjlesq.com.

Contact us today to discuss your business or legal matter. Put our 20+ years of legal experience to work for you.

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For detailed insights and legal assistance on topics discussed in this post, including litigation, contact the Law Offices of Peter J. Lamont at our Bergen County Office. We're here to answer your questions and provide legal advice. Contact us at (201) 904-2211 or email us at info@pjlesq.com.

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About Peter J. Lamont, Esq.

Peter J. Lamont is a nationally recognized attorney with extensive experience in business, contract, litigation, and real estate law. With over two decades of practice, he has represented a diverse range of businesses, from small companies to large international corporations. Peter is well-known for providing practical legal and business advice while prioritizing efficient, cost-effective solutions for his clients.

Peter has earned an Avvo 10.0 Rating and has been recognized as one of America's Most Honored Lawyers since 2011. He has also received accolades from 201 Magazine and Lawyers of Distinction, identifying him as one of the top business and litigation attorneys in New Jersey. His ongoing commitment to his clients and the legal community extends to his roles as a speaker, lecturer, and published author in various legal and business publications.

As the founder of the Law Offices of Peter J. Lamont, Peter brings his Wall Street experience and client-focused approach to New Jersey, delivering personalized legal services tailored to each client's unique needs and goals.

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