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Attorneys’ Fee Provision in a Contract is Rejected as “Unconscionable”

Introduction

As we have previously written, Virginia generally follows the “American Rule” in requests for an award of attorneys’ fees in litigation cases. Jurisdictions that follow the American Rule require each side to pay their own attorneys’ fees, unless a party can point to a statute or contract provision that allows fee-shifting.

In a recent unpublished order, the Virginia Supreme Court struck a contractual fee-shifting provision. This blog post reviews that decision.

Analysis

In the case of Flint Hill School v. McIntosh, parents of the school challenged the fee-shifting provision of their child’s Enrollment Contract. That provision read as follows: “We (I) agree to pay all attorneys’ fees and costs incurred by Flint Hill School in any action arising out of or relating to this Enrollment Contract.”

The Virginia Supreme Court stated in clear terms that this provision was “unconscionable” as an “adhesion contract.”  The Court dismissed the school’s position that “any attorneys’ fees will be limited by reasonableness” because for the Court, the underlying obligation for the parents “to pay the School’s attorneys’ fees . . . in any action arising out of or relating to the Enrollment Contract . . .  creates an inequality so gross that it shocks the conscience.” Specifically, the Virginia Supreme Court stated that “No one with his or her senses ‘and not under delusion’ would agree to this particular attorneys’ fees provision because it is overly broad.”

Therefore, it is important to review attorneys’ fee provisions in all manners of contracting.  Generally speaking, contractual terms setting forth that “the prevailing party” in any action to enforce the contract address the Virginia Supreme Court’s concern on “inequality” between the parties. Obviously, each situation and each party’s bargaining power could result in a different outcome.

Conclusion

The general rule in Virginia is that each side pays their own attorneys’ fees in litigation unless the parties have a contractual fee-shifting provision or rely upon a statutory fee-shifting provision. This case provides an opening for a party to challenge contractual terms if they meet the Virginia Supreme Court’s definition of “unconscionable.” It may be time to review your attorneys’ fee-shifting provisions with your business attorney.

John Tarley

John is the firm's managing partner and chairs the firm's small business, zoning, and litigation practice areas.

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Filed under: Business Law, Common Interest Community, Construction litigation, Employment law, General Interest, HOA, John Tarley, Unit Owners Association by John Tarley

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