Many contracts include a standard provision requiring all disputes that may arise to be resolved exclusively in a particular forum, such as arbitration before a particular alternative dispute resolution provider. Despite the presence of a mandatory arbitration provision, it is not unusual for one party to commence litigation in court, either for tactical reasons or simply by mistake. The standard litigation response is to move to stay or dismiss the lawsuit and to compel arbitration. Because most courts have a strong preference for arbitration, those motions are routinely granted, and the resulting order compelling arbitration will be viewed as a victory. But should it be? After all, such a victory may come at a substantial expense, in the form of attorneys' fees and litigation expenses that never would have been incurred had the other side simply complied with its contractual obligation. Can the victorious litigant recover its fees from the party that breached, or is such recovery barred by the "American Rule," which generally holds that in the absence of a statute or contractual provision authorizing recovery of attorneys' fees, each litigant is responsible for its own attorneys' fees? Although there are no reported cases awarding attorneys' fees for breach of a mandatory arbitration provision, a mandatory arbitration clause is analogous to an exclusive forum selection clause, and there is a great deal of case law addressing whether attorneys' fees may be recovered if a party commences litigation in breach of a forum selection clause. Those cases suggest that fees that are the direct and foreseeable result of a party's commencement of litigation in breach of a mandatory arbitration provision are recoverable as contract damages, while the fees incurred seeking to recover those damages are not.
The availability of attorneys' fees as a remedy for a breach of a forum selection clause makes a great deal of sense when analyzed through a contract law lens. Contract law awards damages for a breach of contract in order to restore an injured party to the position it would have occupied if the contract had been fully performed. Recoverable damages include the "natural, foreseeable and proximate consequence of the breach."1
Cases Holding That Attorneys' Fees Are Recoverable Damages
A number of courts throughout the country have held that attorneys' fees are recoverable as contract damages when they are the foreseeable result of a party's breach of a forum selection clause. Rogovsky Enter. Inc. v. Masterbrand Cabinets Inc., 2016 WL 6432620, at *3 (S.D. Ind. 2016), contains perhaps the most succinct explanation of this principle, applying Indiana law:
MasterBrand is entitled to recover as damages the "loss actually suffered as a result of the breach." [Citation omitted]. Recoverable damages include the "natural, foreseeable and proximate consequence of the breach." [Citation omitted] Attorneys' fees are a natural and foreseeable consequence of litigating a motion to transfer based on a valid forum-selection clause.
In Vianet Group PLC v. Tap Acquisition, Inc., 2016 WL 4368302 (N.D. Tex. Aug. 16, 2016), the federal district court, applying Texas law, held that a party that was sued in a state court in breach of a forum selection clause that required all litigation to take place exclusively in federal court could recover the attorneys' fees incurred in the state court action as contract damages.
In Indosuez Intern. Finance, B.V. v. National Reserve Bank, 304 A.D.2d 429, 431 (1st Dep't 2003), an intermediate New York appellate court, applying New York law, affirmed an award of attorneys' fees, holding that "damages may be obtained for breach of a forum selection clause . . . and an award of such damages does not contravene the American Rule that deems attorneys' fees a mere incident of litigation."
In Lab. Corp. of Am., Inc. v. Upstate Testing Lab., 967 F.Supp. 295, 299 (E.D. Ill. 1997), the federal court, applying Illinois law, held that the defendant's initiation of a lawsuit in New York violated a forum selection clause requiring all litigation in Illinois, and that the plaintiff was "entitled to recover damages for its breach," although the court did not specify whether those damages included attorneys' fees.
In Digimarc Corp. v. Verance Corp., 2011 WL 7077315, at *12 (D. Or. 2011), the federal district court, applying Oregon law, held that a party could recover attorneys' fees as contract damages for breach of a forum selection clause, finding that "there is no principled reason why the breach of the forum selection clause is not actionable."
In Gilbane Federal v. United Infrastructure Projects FZCO, 275 F.Supp.3d 1180, 1196 (N.D. Cal. 2017), the federal district court, applying California law, awarded $73,722.80 in attorneys' fees incurred as a result of the breach of a forum selection clause.
Cases Holding That Attorneys' Fees Are Not Recoverable
Of course, some courts have gone the other way, holding that breach of a forum selection clause does not give rise to contract damages in the form of attorneys' fees. These decisions generally adopt one of two rationales: (1) that granting specific enforcement of a forum selection clause is sufficient to make a party whole, obviating the need for additional damages such as attorneys' fees2; or (2) that the American Rule bars the recovery of attorneys' fees absent a contractual or statutory provision authorizing their recovery.3
At least one Texas court, Haubold v. Medical Carbon Research Institute, LLC, 2014 WL 1018008 (Tex.App.-Austin Mar. 14, 2014), adopted a hybrid rationale, holding that the breach of a forum selection clause does give rise to contract damages in the form of attorneys' fees, but that they may only be recovered in a subsequent action: "[defendant's] attorneys' fees incurred in this case do not constitute actual damages in this case." This bright line rule seeks to preserve the right to recover attorneys' fees as damages, while also recognizing that the American Rule bars recovery of fees that are the incident of litigation. However, it does so in a way that partially undermines both rationales.
There is good question as to whether any of the rationales for depriving a party of the right to recover attorneys' fees caused by the breach of a forum selection clause holds up to scrutiny. The suggestion that dismissal or transfer is sufficient to make a party whole disregards the very real monetary losses - in the form of attorneys' fees and litigation expenses - that a litigant will necessarily have sustained achieving that result. No justification exists for treating a forum selection clause differently than any other contractual provision or for depriving the non-breaching party of its right to be made whole for a breach caused by the other party.
The American Rule Should Not Be A Bar
Properly analyzed, the argument that the American Rule bars recovery of attorneys' fees incident to litigation appears misplaced, as it fails to recognize the distinction between the recovery of attorneys' fees as actual damages and the recovery of attorneys' fees incident to the recovery of other damages. Attorneys' fees that are the direct and foreseeable result of a breach of an arbitration provision - i.e., the fees incurred seeking to stay or dismiss an improperly commenced court action and/or to compel arbitration, are actual damages that may be recovered. However, attorneys' fees incurred in a suit (arbitration) to recover attorneys' fees are not.4
In most cases, there will be a clear distinction between the fees constituting contract damages and fees incurred seeking to recover those damages, as the arbitration seeking to recover damages will take place only after the improperly commenced court action has been stayed or dismissed. In that situation, the fees incurred in the improperly commenced court action are recoverable as actual damages, but the fees incurred in the subsequent arbitration should be considered incidents of litigation and barred by the American Rule. However, that will not always be the case.
For example, in a recent case, a party to a mandatory arbitration provision filed suit in court, which was met with a motion to compel arbitration. While that motion was sub judice, the defendant in the improperly commenced court action commenced an arbitration seeking to recover the fees incurred in making the motion to compel arbitration. The respondent in the arbitration (the plaintiff in the court action) then made a motion in the arbitration to dismiss or stay the arbitration, claiming that the arbitration could not proceed until the motion to compel arbitration was decided. As a result, the party seeking to recover fees was effectively forced to re-litigate the issues raised by the motion to compel arbitration a second time, incurring additional fees in the process, only this time in the context of the arbitration that it had commenced to recover the damages caused by the other party's breach.
Under the bright line rule enunciated in the Haubold case, discussed above, even though the additional fees in the arbitration were incurred opposing the other party's continuing efforts to breach the mandatory arbitration obligation, recovery would be barred for the sole reason that they were incurred in the same suit (arbitration) brought to recover fees. But that makes little sense; the characterization of attorneys' fees as damages depends on whether they are incurred as a direct and foreseeable result of the other party's breach, not on whether they are sought in a separate suit.
The Solution
A potential approach that could harmonize a party's contractual rights with the American Rule would be for the arbitrator to make a factual determination distinguishing between the amount of time the attorneys devoted to opposing efforts to litigate in the wrong forum, and the time devoted solely to the recovery of damages. The former would be recoverable as damages for breach of the mandatory arbitration provision. The latter would not. While this approach lacks the simplicity of Haubold's bright line rule, it is the type of factual determination that triers of fact are asked to make every day. Moreover, it would give full effect to the American Rule while preserving the non-breaching party's contractual right to recover all of the damages caused by the breach.
Footnotes
1. Fowler v. Campbell, 612 N.E.2d 596, 603 (Ind. Ct. App. 1993); see also Ganske v. WRS Group, No. 10-06-00050-CV, 6 (Tex. App. Apr. 18, 2007) (holding that, in an action for breach of contract, actual damages in the form of attorneys' fees may be recovered when the loss is the "natural, probable, and foreseeable consequence of defendant's conduct.").
2. See e.g., Hydrogen Master Rights, Ltd. V. Weston, 228 F. Supp.3d 320 (D. Del. 2017) (applying Delaware law, holding that the remedy for breach of a valid forum selection clause is specific performance and that "monetary damages would not be adequate to compensate the injured party for breach of the forum selection clause.").
3. Steel City Landscape, Inc. v. SMS Assist, LLC, No. 1-14-1868, 2015 WL 2170141 (Ill. App. Ct. May 8, 2015) (applying Illinois law); Brown Rudnick, LLP v. Surgical Orthomedics, Inc., 2014 U.S. Dist. LEXIS 96097 (S.D.N.Y. 2014) (predicting that New York's high court would find the recovery of attorneys' fees for breach of a forum selection clause barred by the American rule, declining to follow Indosuez Intern. Finance, B.V. v National Reserve Bank, supra); Versatile Housewares & Gardening Sys., Inc. v. Thill Logistics, Inc., 819 F. Supp. 2d 230 (S.D.N.Y. 2011) (same); Luv N' Care, Ltd. v. Groupo Rimar, 2015 U.S. Dist. LEXIS 172236, *5 (W.D. La. December 28, 2015) (holding that "Courts from other jurisdictions, applying contract law identical to that of Louisiana, have held that attorneys' fees are not an appropriate form of actual damages for breach of a forum selection clause-at least when the state follows the American Rule."); Westlake Vinyls, Inc. v. Goodrich Corp., 2014 U.S. Dist. LEXIS 84745, *13 (W.D. Ky. June 19, 2014) (finding that Kentucky law does not contemplate an award of attorney fees in absence of statute or contract expressly providing therefore, in accordance with the "American Rule.").
4. Indosuez, supra, 304 A.D.2d at 431; Vianet, supra, 2016 WL 4368302, at *9.
Originally published February 26, 2021
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