Party Who Breaches Settlement Agreement Must Pay Attorney Fees: Court of Appeals

January 14, 2019

The Eighth District Court of Appeals recently re-affirmed in Rayco Mfg., Inc. v. Murphy, Rogers, Sloss & Gambel, 2018-Ohio-4782 (8th Dist.), that parties who breach a settlement agreement must pay the attorney fees incurred by the other side when enforcing the agreement.

The requirement to pay the other side’s attorney fees is a notable departure from norms of American law.  As explained in Rayco, the “American Rule” of litigation provides that a prevailing party may not recover their attorney fees as part of the “costs of litigation,” unless:  (1) a statute requires the losing party to pay for attorney fees; (2) the losing party acts in bad faith; or (3) the parties entered a contract whereby the losing party must pay.   Attorney fees in cases of a settlement breach escape the American Rule, however, because they are “fees incurred after the breach of the settlement agreement [and are] relevant to the determination of compensatory damages, including those fees [a party] was ‘forced’ to incur by filing the action.”  In other words, “[b]ecause the attorney fees sought in that context are regarded as compensatory damages—rather than as costs of litigation to remedy a breach of contract—the American Rule does not preclude their recovery even where none of the other exceptions to the American Rule applies.” 

The Eighth District is not alone in requiring that a breaching party pay the other side’s attorney fees.  Rayco cited case law wherein Ohio’s Fifth, Sixth, Seventh and Tenth District Courts of Appeals have all required a breaching party to pay for the fees needed to enforce a settlement agreement.  The Rayco Court also emphasized that the U.S. District Court for the Northern District of Ohio, and the U.S. Sixth Circuit Court of Appeals have both enforced Ohio’s requirement that a breaching party pay attorney fees. 

The Rayco decision highlights that the issue of attorney fees in litigation is a nuanced question that has many rules, and many exceptions.  Businesses and individuals alike must take care not only to understand these variables when making litigation decisions, but must also consider possible exposure and potential points of bargaining when negotiating business deals and transactional agreements. 

Chad M. Thompson is a Partner in RCO Law’s Toledo, Ohio office, where he represents businesses and individuals in State and Federal Courts throughout the region.

 

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