Twin Cities Business Litigation Blog : Minneapolis Business Litigation Lawyer & Attorney : Gavin P. Craig Law Firm : St. Paul, Twin Cities, Minnesota MN

In a recent case,All-Ways Logistics v. USA Truck Inc., the court found that USA had breached it's contract with All-Ways. This case is interesting on several levels, because it presents the court with a very common issue: When one party breaches part of an agreement, what is the effect when the other party continues to do business with the breaching party?

The defense of USA was simply this: All-Ways waive the breach of contract by USA! The facts are simple. All-Ways is a freight broker. USA contracted with All-Ways to find business for USA, and USA would pay them a 5% commission. All-Ways found some large customers for USA, and all went well for 2 years. After two years USA told All-Ways they would no longer pay commissions on a large customer, and they solicited the business themselves. All-Ways understandably objected, but continued to solicit business for USA from other customers. After a while, USA terminated the agreement completely.

All-Ways sued for breach of contract and unpaid commissions. All-Ways wanted the commissions for freight hauled during the term of the contract, even if USA solicited the customers directly. USA claimed that All-Ways waived the breach of contract. The jury found that USA had breached the contract and awarded damages of $2,966,880, plus the court awarded prejudgment interest of $583,000, attorney fees of $1,000,000, and costs of $18,000. USA appealed.

Part of the decision concerned the trial courts refusal to give specific jury instructions relating to waiver; the argument being that All-Ways continued to receive the benefits of the contract after USA breached the contract. The trial court refused to give the instructions to the jury. The trial court determined that the commission agreement was a severable agreement, so that the breach of one part is not a breach of the others. In other words, if USA refused to pay commissions on one shipment or from one shipper, All-Ways did not waive the breach by accepting commissions on other shipments.

The circumstances of the parties in this case are common. One party contracts with another, and at some point the party making payments finds another less expensive way to get the same result. Meanwhile, the 1st party is stuck. Do they walk away from a good contract because the other party stole a customer?

This case could have gone the other way, with the court finding that there was a waiver. In my opinion that would have been an unfair result, but it is not difficult to waive your rights under a contract. Any party can waive their rights. The answer is that parties to a contract in this situation need to carefully consider the consequences of their actions. There is no simple answer and each case stands on its own merits. In the present case, it cost USA a lot of money to steal the customers. So Buyers Beware!

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I always enjoy reviewing the California Attorney Fees Blog. California has some attorney fee shifting statutes, and they enforce contracts providing for attorney fees. Whether this has helped or hurt the trial court case load is always a subject for debate.

In a recent case, Cardet v. Burlison, Case No. B198625 (2d Dist., Div. 2 Dec. 17, 2008), the court looked at a law firm's retainer agreement for support to award fees. One of the questions before the court was whether the law firm's retainer agreement provided for the recovery of attorney fees against the law firm in the event there was a successful negligence (tort) claim against the firm. It is certainly common for retainer agreements to provide for the recovery of attorney fees expended in recovering past due fees. The provision in question read:

"If legal action is required to enforce this Agreement or to collect any fees or costs earned or advanced pursuant thereto, the prevailing party shall be entitled to recover any and all costs of such action, including, but not limited to, the expenses and court costs of the action [and] a reasonable attorneys fee."

The case goes all the way back to the January 17, 1994, Northridge earthquake in the Los Angeles Area. Cardet was a contractor and was not paid for certain improvements to property. The Plaintiff's attorneys did a very poor job prosecuting a mechanic's lien, including their failure to name the property owners of the improved or repaired property.

Cardet ultimately won a malpractice claim against the defendant law firm for a net amount of $500,577.30. In February 2007, Cardet filed a memorandum of costs, seeking, inter alia, $272,492.50 in attorney fees. The court ultimately granted $269,492.50 in attorney fees.

What is the basis for awarding attorney fees? The retainer agreement!

California Civil Code section 1717 provides, in relevant part:

(a) In any action on a contract, where the contract specifically provides that attorneys fees and costs, which are incurred to enforce that contract, shall be awarded . . . to the prevailing party, then the party who is determined to be the party prevailing on the contract . . . shall be entitled to reasonable attorneys fees in addition to other costs. . . (b)(1) . . . [T]he party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract.

The court held the the retainer agreement contract language providing for attorney fees, "[i]f legal action is required to enforce this Agreement," was broad enough to cover both Tort and Contract claims.

I would guess that there are a lot of legal retainer agreements that have exactly the same language in them. A word to the wise: Check the language in your retainer agreements. Would the result have been the same if the agreement had specifically stated that the attorney fee provision only applied to fees incurred to collect legal fees?

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One of the many things that the unwary businessperson can do on occasion is unintentionally create a franchise. The obvious reason is the failure to consult an attorney. Every state has its own franchise laws, and some are better than others depending upon whether you are representing the franchiser or the franchisee.

In general, a franchise is very easy to create, and thereby subject the creator to state franchise laws and regulations. The basic elements are:

1. A contract or agreement, either express or implied, whether oral or written, for a definite or indefinite period, between two or more persons:

a. by which a franchisee is granted the right to engage in the business of offering or distributing goods or services using the franchiser's trade name, trademark, service mark, logotype, advertising, or other commercial symbol or related characteristics (you use my name and send me a fee and we will both make money);

b. in which the franchiser and franchisee have a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise (We both make money and I will expand my business);

c. for which the franchisee pays, directly or indirectly, a franchise fee.

Pretty easy. The owner makes a verbal agreement to allow someone to use his trade name for a fee would pretty much satisfy the requirements. Much of the franchise litigation is over the issue of whether the payments amounted to a fee. If they didn't - there is no franchise. But then, the problem is that the unintended franchiser must litigate whether the business arrangement was a franchise or not. So the unintended franchiser agrees to allow someone to use its trade name to conduct business, all for a small fee per transaction. Franchises are securities, and as such they must be registered.

In my experience, many business owners wanting to expand their businesses come up with plans that look a lot like a franchise. They have no idea that the proposed business arrangement might created a franchise or a security. If there is a franchise, most states carefully regulate the franchise and require filings and approvals. Franchise law is a world unto its self. The failure to comply with the relevant states franchise laws create serious potential liability for the unintentional franchiser.

Another great thing about a franchise is that, in many states, the franchisee is entitled to costs and attorney fees if the franchiser is in violation of the franchise agreement and the franchisee incurred real damages. This is especially interesting when the alleged franchise agreement is verbal.

Franchise laws are intended to protect the public. The smart business owner will talk to his or her counsel BEFORE entering into any agreement that allows others to use their trade name(s) or trade mark(s).

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I spent as fair part of my career as an in-house corporate counsel for several large corporations. I don't regret that experience at all, and I watched as corporate executives made many (sometimes costly) errors in judgment despite counsel to do something different.

But when the need for outside counsel arose (usually to defend a lawsuit, but sometimes to get specialized advice about certain areas of the law) the business almost always hired a major law firm. Why? Larger law firms are expensive, and some have a tendency to load up cases with lawyers. (Assigning multiple lawyers to a case - thereby giving all the lawyers a case where they can charge their time. )

I once called a large (I wont mention the name) firm in Washington DC to ask if they had anyone in the firm that could handle a specialized international law question. I talked to a senior partner and he set up a telephone conference with some other senior people at the firm so I could ask them about their capabilities. We had a telephone conference that lasted about 45 minutes where I asked a number of questions.

We had not even made the decision about who to hire as counsel when, within a week, they sent me a bill for $3,500.00 for the telephone call. Their theory must have been that my company should pay for the time they took to convenience me that they could handle the matter I inquired about. I told them what they could do with their invoice, but the larger lesson is that large firms need to generate fees to stay alive. So they charge everything - regardless of how inappropriate it is. I probably don't even need to mention that we elected to give the work to another (smaller) firm.

Does the corporate client get more for their money? Do they get a better result that is worth the extra money? I truly doubt it. That is not to say that larger firms always overcharge or that teams of lawyers are never appropriate. There are some issues where, because of the complexity, there is a need to get several lawyers involved, or the resources of large firms are sometimes needed.

When I set up my practice I was able to handle both large and small cases. When necessary I teamed up with other lawyers. I enjoy cases where the opposing party hires a large law firm, because they generate lots of motions and bill for every minute. The opposing party sometimes gets real sticker shock when the first legal bills arrive. I try to wait until I am sure that the other party has received bills from the law firm before I will suggest settlement discussions.

The point of this post is not that all larger law firms are bad, but in my experience they are not a bargain for the corporate client either. I once saw a $6,000,000 problem resolved by another large DC firm and the legal bills were - yes, you guessed it - a little over $6,000,000.

I handle a lot of business and commercial disputes. Usually the client is a smaller firm or an individual. I think that I bill fairly for the work I do, and I don't need to feed a large overhead. Business owners should think about the cost of legal services and at least investigate other possibilities. My recommendation - interview different firms or lawyers and ask a lot of questions. It rarely pays to get the most expensive legal services when the matter does not justify the expense. It never hurts to ask a law firm how they bill and what can the client expect for the cost! And, it can be costly to react and not ask! It is also costly to assume that the larger the firm is better at handling the matter at hand. Big does not equate to better.
 

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      “Can I get my attorney fees from the other side?” Most clients caught in a legal fight want to know the answer to this question as soon as they meet their lawyer. Everyone would like to recover their attorney fees from the other party. I am asked this question frequently, and in Minnesota and most jurisdictions, the answer is usually, “No.” There are only two exceptions: where there is a statute that provides for the recovery of attorney fees; or, the parties have a written contract that provides that the prevailing party (the winner) is entitled to recover their legal fees from the other side. This is the general rule in most states. Whether it should continue to be the rule is a good public policy question.

     Parties to written contracts usually have a choice to make if they want to add a contract provision for legal fees. If the fees are only recoverable by the prevailing party (the prevailing party is usually - but not always - easy to identify) each party must believe that: a) the parties will never have a dispute that requires lawyers to get involved, or b) they will prevail. Attorney fee provisions in contracts are fully enforceable, just like any other provision in a contract. The, “I didn’t read it,” defense is not going to be a winning argument in any action to enforce.

     Many form contracts provide that an out-of-state seller is entitled to recover their attorney fees, and by the way, you agree that they can sue you in some distant jurisdiction. People rarely read these form contracts before they sign them, and they are surprised when they get sued in New Jersey or Texas, or anyplace other than their home state, because the contract they signed said any action will be brought in the distant land. These out of state actions usually result in default judgments that include attorney fees.

     If the dispute is between parties that have no written contract, or no attorney fee provision, the only way to recover attorney fees is when there is a statute that allows the recovery of the fees. There are very few statutes that provide for shifting the burden of fees. (There are some very rare exceptions to this rule, but the general rule is as I stated it above.)

     If you want to have the right to recover attorney fees when the other party breaches your contract, put it in the contract. But the risk is that you might not win the case, if there is one, and you end up paying the other parties fees.

     Only a few states have laws that shift attorney fees. (Usually know as the "English Rule.") Around the world the US is one of the hold outs in instituting a fee shifting system. There is an interesting discussion of this topic here.

     One advantage to a fee shifting contract clause is that it usually encourages the parties to settle to avoid the risk of losing not only the case, but having to pay the other party’s lawyer fees. But, like many things in life, this is not always the case and some parties will continue a case hoping they will win both the case and also recover their fees.

     If you are going to enter into a contractual relationship with another party, and need to write a contract, consult a lawyer. Good examples of contracts where the parties might want to consider an attorney fee provision are home remodeling contracts, construction contracts, contracts for the purchase of a business, or agreements to form a partnership or create a business entity. All of these types of agreements should be in writing, and you might even want to consider a "loser pays" attorney fee provision.

     I always check the contracts of client to see if there is any fee shifting language. For both the plaintiff and the defendant, the "loser pays" attorney fees provision adds risk.

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