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Contractual Attorney Fee Awards May Be Contested

In a recent decision, the Arizona Court of Appeals, Division One, issued a ruling moving the burden of proving reasonableness of attorneys’ fees sought by a successful party to the applicant.   The underlying contract contained a fee shifting provision.

In Geller v. Lesk,  P.3d 2012, 2012 WL 4364241 (App. Sept. 25, 2012), the Court of Appeals  held that even where there is a contractual fee shifting provision, that the court retains discretion to limit any award to a reasonable level. This new ruling imposes limits on the enforcement of broadly drafted contractual fee-shifting provisions.  It may affect how some legal collection practices operate and how companies analyze potential litigation awards.

The fee shifting provision in the Geller case contained no express reasonableness limitation. Geller’s counsel was retained to sue Lesk for breach of a promissory note.  The law firm was retained on a 25% contingency fee agreement. After litigating for some time, plaintiffs were granted summary judgment. The promissory note provided that Lesk would pay all costs of collection, including the plaintiffs’ attorneys’ fees. The trial court entered a fee award granting plaintiffs’ fees based on the contingency arrangement, or about a $175,000 fee award.  Geller’s counsel told the trial court he may have spent approximately $30,000 worth of time, if calculated on an hourly basis. Defendant appealed the $175,000 attorney fee award based on reasonableness.

Basing its decision on a prior ruling of the Arizona Supreme Court, Elson Development Co. v. Arizona Savings and Loan Association, 99 Ariz. 217, 407 P.2d 930 (1965), the Court of Appeals vacated the trial court’s fee award and remanded for a reasonableness determination, finding that plaintiffs had not made a prima facie showing that the fees were reasonable. Interestingly, in Elson, the Arizona Supreme Court stated that the evidentiary burden rests on the party defending the fee request and that it is that party’s burden to show fees based on a contractual fee shifting provision are not just unreasonable, but are “obviously excessive.” The Geller decision shifts the burden to the applicant to prove the reasonableness of the requested fees.

The Geller decision may change how some legal contingency collection work and other contingent legal work is performed.  Attorneys will want to review the type of records they are keeping when doing contingency collection work and certain types of other contingent legal work. Successful parties will have to be ready and able to prove that requested fees are reasonable, even where the other party has expressly agreed by contract to pay all fees.  Interestingly, the lowered award of attorneys’ fees may not reduce the contractual obligation that the client has with their attorney as it relates to legal fees, which is something attorneys will have to address in their fee agreements.   This case additionally highlights the importance of and need for written fee agreements.

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