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Beware of the Magic Words

Beware of the Magic Words

"The law applies common sense," I often tell my clients. "No special words are usually needed when you draft an agreement; just make sure it is clear." Unfortunately, that is not always the case. After suffering a recent disappointment in a case in Federal court, my client, Aversion Technologies, consented to my discussing its case here so that others can take heed and avoid what happened.

Aversion, a small Maryland business, entered into a contract with C-Tech Corporation, a company based in India. Aversion drafted the agreement, which included the following language: "In the event that litigation is instituted to enforce any provision of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs of such litigation."

C-Tech filed a very questionable suit against Aversion in the U.S. District Court for the District of Maryland. Aversion responded to the lawsuit and filed a counterclaim based on the provision above. After months of litigation and tens of thousands of dollars in legal fees, Aversion filed a motion with the court showing that C-Tech had no case and asking the Court to grant summary judgment. On the date that C-Tech's response was due in court, C-Tech instead asked the court to dismiss its case with prejudice (ending its case with the proviso that it could never sue on its so-called claim again).

So my client, Aversion, was unquestionably the prevailing party. Good result. All that remained was to get back the money spent on defending against C-Tech's meritless lawsuit. When Aversion asked for its attorney's fees, C-Tech refused, claiming that the language "reasonable costs of such litigation" included out-of-pocket litigation expenses such as postage, copies, and court filing fees, but did not include what was by far the largest expense: the attorney fees.

So Aversion filed a motion with the court seeking its litigation expenses, including attorney's fees. Courts in the United States apply the "American rule," which says that each party must bear its own attorney's fees unless there is a statute specifically providing for attorney's fees or unless the parties' contract provides for such fees. C-Tech argued that unless the agreement specifically referred to attorney's fees, the Court could not award them to Aversion.

Aversion argued that "reasonable costs of such litigation" obviously referred to attorney's fees because attorney's fees are the largest component of most litigation expenses. Aversion also argued that because both Maryland courts and the Federal courts allow a prevailing party to recover "costs" even if their contract does not refer to costs, it would be illogical to think that the parties would go to the trouble of including a provision in their contract to cover this fairly negligible litigation expense.

The U.S. District Court (Chief Judge, Deborah Chasanow) agreed with C-Tech. The Court had two possible avenues to resolve the question. If it found the language unambiguous, it could apply the unambiguous meaning. If it found the contract ambiguous, the court could withhold judgment and let a jury decide what the words meant based on the evidence and testimony of the parties. The court found that the language in question plainly did not encompass attorney's fees. The court reasoned, "under the objective theory of contract interpretation, which applies in Maryland, a court must 'give effect to the plain meaning of an unambiguous term, and will evaluate a specific provision in light of the language of the entire contract.' Contract terms must be construed according to their 'customary, ordinary and accepted meaning,' regardless of the parties' intentions at the time the contract was formed. Therefore, when interpreting a contract, the court's task is to 'determine from the language of the agreement itself what a reasonable person in the position of the parties would have meant at the time it was effectuated.'"

In the opinion of Chief Judge Chasanow, "the term that must be construed—'reasonable costs of such litigation'—is not ambiguous. Black's Law Dictionary defines 'litigation costs' as '[t]he expenses of litigation, prosecution, or other legal transaction, esp. those allowed in favor of one party against the other' and further notes that 'some but not all states allow parties to claim attorney's fees as a litigation cost.' Maryland decidedly is not one of those states."

I respectfully believe that the Court erred by using a "reasonable attorney in the position of the parties" standard (hence the reliance on Black's Law Dictionary) rather than a "reasonable person in the position of the parties." It is my unscientific belief that business people in the position of the parties would have believed that "reasonable expenses of such litigation" would encompass attorney's fees. But apparently my belief is wrong and anyone who fails to use "magic words"--"including reasonsable attorney's fees" may have an unpleasant surprise as my client did.

So a warning to any reader who is either (a) tempted to write a contract without the help of an attorney; or (b) drafting a contract and wants to make sure that attorney's fees are recoverable in the event of litigation: you must reference attorney's fees very explicitly! Refer to them often and in detail. Leave no room to read between the lines.

In one respect, Aversion had a good result from the litigation: complete vindication and freedom from future attacks by C-Tech. Aversion will also get back some of its non-attorney legal expenses. But in another sense, even this victory leaves Aversion feeling that justice was not done because the remedy that my client thought he had planned for—legal fees to offset the burden of defending an unmeritorious case—was denied.