April 2016 Bar Bulletin
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April 2016 Bar Bulletin

When a Prevailing Party Attorney Fee Clause Is Unconscionable

By David C. Burkett and Michael R. Caryl

 

Washington courts traditionally follow the American Rule regarding shifting liability for attorney fees: Each party bears its own fees in the absence of a contract, statute, court rule or recognized ground in equity.1

We discuss reciprocal fee-shifting contractual provisions that are unenforceable because they violate public policy. We also provide practical drafting suggestions designed to help avoid the problem.

Washington courts have struck down reciprocal, contractual prevailing party fee provisions on public policy grounds, despite Washington law regarding reciprocity of fee-shifting contracts. Where any contract specifically provides that attorney fees and costs incurred to enforce the provisions of the contract shall be awarded to one of the parties, by statute the prevailing party, whether he or she is the party specified in the contract, is entitled to reasonable attorney fees and costs.2 Washington thus embraces the concept of reciprocity for contractual prevailing party fee recovery. Even so, we must consider when public policy precludes enforcement of a reciprocal prevailing party fee contract.

The determining factor is statutory language authorizing recovery of fees only by the prevailing plaintiff. When a statute does not allow a prevailing defendant to recover fees, a reciprocal fee-shifting contract is deemed to be substantively unconscionable. The rule has been applied in connection with wage claims and Consumer Protection Act claims.

Wage Claims

A plaintiff who prevails in an action brought under the Washington wage-and-hour laws is entitled to an award of reasonable attorney fees and costs in the action.3 The enabling statutes provide for an award of attorney fees only for prevailing employees.4

Because the statutes do not allow a prevailing defendant employer to recover fees, a contract term that requires the imposition of fees against an employee who does not prevail on a wage claim is unconscionable and unenforceable as being in violation of public policy.

Division I of the Washington Court of Appeals considered the enforceability of a mandatory fee-shifting provision in an arbitration agreement contained in an employment contract. The plaintiff-employee (Walters) worked in Washington for A.A.A. Waterproofing, Inc., a Colorado corporation, pursuant to a written employment contract that contained an arbitration agreement.

The employer moved to compel arbitration. The trial court granted the motion, enforcing the arbitration agreement in its entirety. The arbitration agreement provided: “The prevailing party in any such arbitration shall be entitled to all costs and expenses of such arbitration (including its reasonable legal fees).”5 The Court of Appeals reversed, holding that the case could only go forward if the substantively unconscionable “loser pays” provision was severed from the arbitration agreement, along with an unconscionable provision providing for venue in Denver.

Walters had argued that the prevailing party term was substantively unconscionable because the risk of having to pay the employer’s arbitration expenses and attorney fees would deter employees from seeking to vindicate their statutory rights, such as the right to overtime pay.6 The Court of Appeals agreed, holding:

While Walters is assured that he will recover his expenses and legal fees if he wins decisively, he must assume the risk that if he loses, he will have to pay Waterproofing’s expenses and legal fees. This risk is an enormous deterrent to an employee contemplating a suit to vindicate the right to overtime pay. Under these circumstances, in the context of an employee’s suit where the governing statutes provide that only a prevailing employee will be entitled to recover fees and costs, a reciprocal attorney fees provision is unconscionable and, therefore, unenforceable.7

The employment contract also contained a severability clause indicating that if a court declared any provision in the agreement to be unenforceable, the rest of the agreement shall remain in full force.8 When a court finds a provision in an employment arbitration agreement to be unconscionable, the court may enforce the remainder of the contract without the unconscionable clause.9

Severability is particularly likely when the agreement includes a severability clause.10 A court will declare the entire arbitration agreement unenforceable only when unconscionable provisions are pervasive.11 Because the “loser pays” and Colorado venue provisions were both “easily severed,” the Court of Appeals did just that.12

The Washington Supreme Court has followed Walters. In a dispute involving an arbitration agreement contained in an employment contract governed by California law, which contained a reciprocal fee-shifting provision, Washington employees sought to avoid arbitration on the grounds of substantive unconscionability with respect to the fee-shifting provision.13


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