Page 10 - Complex Litigation

S10 | MONDAY, MAY 22, 2017 | Complex Litigation
| NYLJ.COM
Fee-Shifting E ect
Of Choice-of-Law Clauses
in a contract dispute governed by Canadian law.8 Like RLS, the Atchison court ultimately found that availability of attorney fees was a substantive issue, and as such, had to be resolved under the law governing the con- tract. Although no fees were actually awarded in that case because the parties had failed to preserve their claims for fees, the court pre- sumably would have awarded fees because Canada follows the English Rule.9
In other cases that shifted fees under a choice-of-law clause, courts followed a more streamlined analysis and held that the very presence of the choice-of-law clause providing for the application of the law of a fee-shifting jurisdiction incorporated the English Rule by reference. For example, in El Paso Natural Gas Company v. Amoco Production Company, the Delaware Court of Chancery ruled that the prevailing defendant was entitled to attor- ney fees in an action for breach of contract whose choice-of-law provision called for the application of Texas law.10 It was undisputed that Texas law permitted recovery of fees by a party that prevailed in a contract dispute. The El Paso court took the view that “the question of attorneys’ fees [becomes] a substantive matter of contract, and not a choice of law question,” whenever the law that governs that contract follows the English Rule.11 The court’s opinion largely followed §187(1) of the Restatement (Second) of Con icts and the of cial commentary to that section, nding that designation of Texas law as the govern- ing law lled the gap in a contract that was otherwise silent on attorney fees.12
In Katz v. Berisford International, the South- ern District of New York followed the same approach as in El Paso and held that the choice-of-law clause adopting English law had “the effect of incorporating English law [on attorney fees] by reference.”13 Unlike the court in RLS, the court in Katz largely bypassed the question of how New York law would treat England’s rules on attorney fees, and focused instead on the effect of the parties’ agreement to have English law govern their contract. The court ruled that “the parties’ choice of English law should be interpreted as encom- passing the English rule that the prevailing party may recover its attorneys’ fees.” The Katz court further noted, as did the court in RLS, that because the parties agreed to an English choice-of-law clause, applying the English Rule “would be wholly [] consistent with [their] justi ed expectations.”14
Courts That Declined to Award Attorney Fees Despite a Choice-of-Law Clause
Other courts have declined to deviate from the American Rule despite a choice-of-law clause providing for the law of an English Rule jurisdiction.
In two recent decisions from the Southern District of New York, Atomi v. RCA Trade- mark Management., S.A.S.15 and Deutsche Bank Trust Company v. American General Life Insurance Company,16 the court refused to apply the English Rule in contract cases that involved French and English choice-of- law clauses, respectively. Both decisions observed, as a preliminary matter, that “it is unsettled whether a choice-of-law clause providing that an agreement is governed by
BY ROBERT SILLS
AND IGOR MARGULYAN
It is common practice in commercial transactions to agree that the law of a particular jurisdiction will govern the parties’ contract and to memorialize that agreement in a choice-of-law clause. In nego- tiating for such clauses, parties normally recognize and expect that if their contract becomes the subject of litigation, the law on which they agreed will, subject to certain exceptions, govern the resolution of the contract claims. However, it may not be widely known that the choice-of-law clause could make the party that loses the litiga- tion liable for the attorney fees of the win- ning side, in contrast to the usual rule in the United States that the prevailing party cannot recover its attorney fees unless the contract has an express fee-shifting provi- sion or a statute applies that permits such recovery. Unlike the United States, most Western legal systems follow the “English
ROBERT SILLS is a partner and IGOR MARGULYAN is a senior associate at Orrick Herrington & Sutcliffe in New York.
Rule,” which requires the losing party to pay the prevailing party’s reasonable attor- ney fees.1
Courts Holding That a Choice-of-Law Clause Imports the English Rule
Several U.S. decisions have held that a prevailing party may be entitled to attorney fees where the applicable choice-of-law clause selects the law of an English Rule jurisdiction. In doing so, those courts have adopted vary- ing rationales.
First, some courts treated the applicability of the English Rule as a typical choice of law question and looked to the con ict of laws rules of the relevant forum. For example, in RLS Associates v. United Bank of Kuwait, the Southern District of New York held that the English Rule applied in an action brought by a U.S. company against a London-based bank in connection with a set of consultation agreements.2 The agreements provided that they “shall be governed in accordance with the laws of England.”3
To nd that the English Rule applied, the court began by recognizing that “contractual choice of law clauses only apply to substan- tive issues,” and not to matters of procedure.4
Sitting in diversity, the court then examined New York’s rules on con ict of laws to deter- mine whether attorney fees should be treated as substantive or procedural. The court noted that whether English law considered attorney fees procedural was not controlling; rather the issue was whether the English Rule “would be considered procedural under New York law.”5
Because no New York case appeared to have directly addressed that issue, the court turned to “general principles of substance- procedure analysis followed by New York courts” and, based on those principles, found that English law on attorney fees was substantive for choice of law purposes. The court concluded that the fee-shifting regime under English law “creates a quasi-right of action for ‘wrongful’ legal costs,” which war- ranted treating English law on attorney fees as substantive.6 Moreover, the court observed that failing to apply the English Rule would frustrate the expectations of the parties, who “entered into a contract governed by English law and both assumed, well into litigation, that the English rule on attorneys’ fees would apply.”7
Similarly, in Atchison Casting v. Dofasco, the District of Kansas undertook a choice-of- law analysis under Kansas law to determine if the prevailing litigant could recover fees
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