Roy B. Oser, Esq.

Paying for lawyers is a little like playing golf. People like to make jokes about it or vent their frustration or rage, but few know how to do it properly. A little knowledge about some of the rules of the game can whittle down your handicap.

If you become a plaintiff or defendant, you will soon be confronted with the so-called "American" rule, under which each party to litigation pays his or her own legal fees. Accordingly, even if the court rules in your favor in awarding a final judgment, and on every issue leading to that judgment, you are still left with the bill for your own legal fees. This contrasts with the “British” rule, where the loser pays the winner’s fees. The American rule is often a hard lesson for plaintiffs who litigate out of spite or for revenge, or to "send a message," without first doing some cost-benefit analysis.

Strategies for containing legal expenses include creative fee arrangements, including those known as “mixed contingency,” cap, and payment in kind (goods or commodities) rather than in cash. Many lawyers bill by the hour. But that may not be the best arrangement for you or your lawyer. You may want to consider a mixed contingency arrangement, under which the lawyer is paid a lump sum or at a lower-than-standard hourly rate together with a percentage of any recovery. Rather than or in addition to a lower hourly rate, the contingent fee can be combined with capping the paying of hourly fees at a certain level.

A claim that a client could not afford to pursue if the attorney is paid by the hour may be affordable with a mixed contingency fee agreement. If the claim is unsuccessful, the lawyer’s fee is limited by the arrangement. (Under a full contingency arrangement, the lawyer does not get paid at all if the litigation is unsuccessful.) Of course, attorneys accept these arrangements only if they feel there is a good chance of winning a judgment against a solvent defendant.

Another way to manage legal expenses is to think about them when negotiating a transaction rather than waiting until a dispute develops. Many of the following standard contractual provisions can have a major impact on the cost of any later legal proceedings arising from that transaction:

1. jurisdiction clauses, under which the parties agree to submit disputes to a certain jurisdiction, and agree to accept service of process in that jurisdiction;
2. liquidated damages clauses, under which the parties agree that if the contract is breached, damages in a certain sum are presumed (however, many courts require that these clauses be “reasonable” in order to be enforceable);
3. injunctive remedy clauses, under which the parties agree that if the contract is breached, the party seeking to enforce the contract against the breaching party is entitled to injunctive relief, under which a court requires a party to take some remedial action rather than merely pay compensatory damages;
4. loser pays winner’s attorneys fees clauses, reversing the American rule; and
5. arbitration and mediation clauses, requiring the parties to submit their dispute to non-binding mediation or binding arbitration, or both. Mediation and arbitration are often appropriate for contractual parties with a long-term ongoing relationship who anticipate relatively minor disputes during the course of their relationship. They are not, however, necessarily the best or even the most cost-effective approach to contractual disputes.

The essential point to remember is that with some advance planning, your legal expenses can be brought under control.

There are exceptions to the American rule that each party pays his or own legal fees. Most of these are statutory and are contained, for example, in the Employment Retirement Income Security Act (ERISA) and the Racketeer Influenced and Corrupt Organizations Act (RICO).

ERISA is a federal statute that gives employees and retirees a civil claim against managers of employee pension plans and certain other fiduciaries for mismanagement of pension funds. Under ERISA, the award of attorneys’ fees to the winning party (that is the losing party pays the winning party’s attorney’s fees) depends on the following factors: (1) the degree of culpability or bad faith attributable to the losing party; (2) the depth of the losing party’s pocket, i.e., his or her capacity to pay an award; (3) the extent (if at all) to which such an award would deter other persons acting under similar circumstances; (4) the benefit (if any) that the successful suit confers on plan participants or beneficiaries generally; and (5) the relative merit of the parties’ positions.

Under RICO (the Racketeer Influenced and Corrupt Organizations Act), which is also a federal statute, treble damages and attorneys fees may be awarded to a successful plaintiff. The chance for treble damages has led legions of litigants to seek creative ways to assert claims under RICO, and a long list of federal court decisions, most of which have resulted in stringent limitations on RICO claims.

Other exceptions to the American rule pertain to procedures of federal and state courts for class actions, that is, actions in which a representative plaintiff or defendant is permitted to litigate on behalf of an entire class of similarly situated persons. Representative parties’ attorneys’ fees are awarded by the court on the basis of factors such as the benefit conferred on the class.

There are also some less exotic circumstances under which someone else might foot the bill for your litigation. Court-appointed executors, trustees, guardians, and other fiduciaries who are litigating on behalf of their beneficiaries may have their legal fees paid from the estate of the beneficiary.

If none of the above exceptions apply to your claim or defense, you will most likely be confronted with your attorney’s bill. Keep in mind that there are other and better ways of making that bill easier to deal with than making jokes about it (or trying to), or venting your frustration or rage.

Roy B. Oser practices law in New York and New Jersey.