Practical Insights for Business Owners
Client Q&A: I’m Getting Sued for Breach of Contract. The Defense Costs Are Almost as Bad as the Suit Itself. Can I Force the Plaintiff to Pay My Attorneys’ Fees if I Win?
For many businesses, the cost of defending against a lawsuit—even one that has little chance of success—can be harrowing. And defending against a breach of contract claim can be especially expensive—since insurance often doesn’t cover contract claims, contract (unlike fraud) claims don’t require a plaintiff to plead its claim with particularity, and issues of fact may make a quick dismissal impossible. Thus, businesses sued for breach of contract have two, often-unappealing options: defend the claim on the merits and incur significant legal fees, or default and be on the hook for a judgment.
The default rule in New York—absent a fee-shifting clause in a contract or a fee-shifting statute (like some civil-rights statutes)—is that each party to a lawsuit pays its own legal fees, even if it wins its case. But a little-known section of the New York Civil Practice Law and Rules allows a successful defendant in a contract suit to shift some of its legal fees to the other side.
Under C.P.L.R. § 3220, a party against which a contract claim is asserted can “serve upon the claimant a written offer to allow judgment to be taken against him for a sum therein specified, with costs then accrued, if the party against whom the claim is asserted fails in his defense.” This is different from an offer to compromise under C.P.L.R. § 3221 or an offer of judgment under Federal Rule of Civil Procedure 68—under which a party offers to settle both liability and damages for a set amount. Instead, under C.P.L.R. § 3220, a party makes an offer to liquidate damages conditionally—meaning that the offeror agrees to pay a set amount of damages, but only if the claimant first wins on liability.
Under C.P.L.R. § 3220, the claimant has ten days to accept the offer and fix the damages to which it will be entitled if it wins on liability. But if the claimant doesn’t accept the offer, it must then pay the “expenses necessarily incurred” by the party making the offer for “trying the issue of damages from the time of the offer.” So unlike C.P.L.R. § 3219 and Fed. R. Civ. P. 68—under which a party that rejects an offer is liable to the offeror only for its “costs”—C.P.L.R. § 3220 makes the claimant liable for some of the offeror’s “expenses” incurred after the offer, which includes attorneys’ fees. Reinhard v. Connaught Tower Corp., 150 A.D.3d 431, 432 (1st Dep’t 2017) (defendant “entitled to attorneys’ fees pursuant to CPLR 3220”); Abreu v. Barkin & Assocs. Realty, Inc., 115 A.D.3d 624, 624 (1st Dep’t 2014) (claimant liable for offeror’s “costs and fees” under C.P.L.R. § 3220); McMahan v. McMahan, 38 N.Y.S.3d 728, 732 (Sup. Ct. Westchester Cty. 2016) (under C.P.L.R. § 3220, “‘expenses’ to be recovered by the defendant, where plaintiff does not obtain a more favorable judgment, includes attorney’s fees”), aff’d sub nom. Perry v. McMahan, 164 A.D.3d 1488 (2nd Dep’t 2018).
The fees for which the claimant is liable are limited to the offeror’s fees incurred in “trying the issue of damages.” C.P.L.R. § 3220; see Siegel, Practice Commentaries, C3220:1 (“Note that P’s failure to establish liability or to win damages in excess of D’s offer invokes the sanction, but that the sanction consists of reimbursement only for the expenses of trying the damages question. Since liability was not conceded, D is not entitled to reimbursement for the expenses attributable to the liability aspect of the trial.”). In the Second Department, the “commencement of a trial” is a “condition precedent” to “imposing liability upon the claimant for the opposing party’s expenses.” Saul v. Cahan, 153 A.D.3d 951, 953 (2nd Dep’t 2017). So there, defeating a contract claim on a motion to dismiss or for summary judgment doesn’t invoke any fee shifting. But in the First and Third Departments, defeating a contract claim on a motion to dismiss or for summary judgment—or even getting the claimant to withdraw the claim by stipulation—invokes fee shifting for some portion of the offeror’s fees. Abreu, 115 A.D.3d at 624 (claimant liable for offeror’s attorneys’ fees when claimant withdrew claims “in a stipulation on the record at trial”); Morgan v. Kunker, 268 A.D.2d 749, 751 (3rd Dep’t 2000) (plaintiff liable for defendant’s attorneys’ fees when court granted summary judgment for defendant). Indeed, in defeating the contract claim altogether, the offeror would have necessarily incurred fees in showing that the claimant was not entitled to any damages.
Thus, a party against which a contract claim is asserted should always consider serving an offer under C.P.L.R. § 3220 at the beginning of the case for $1. The claimant presumably won’t accept the offer, and if the offeror defeats the contract claim altogether (either at trial in the Second Department, or on a dispositive motion in the First and Third Departments), the claimant will be liable for some of the offeror’s attorneys’ fees and costs. And while this liability extends to only a portion of the offeror’s fees, the party against which a contract claim is asserted loses nothing by making this offer, and creates an upside for itself if it defeats the contract claim.
Thus, a defendant (or plaintiff against which a counterclaim for breach of contract is asserted) that makes offer under C.P.L.R. § 3220 shifts some of its liability for its attorneys’ fees to the plaintiff, and gives a plaintiff with a weak contract claim additional downside. This can serve a valuable purpose in later settlement negotiations, and can also allow a successful defendant to recover a portion of its fees and costs.