“Legal Costs” Do Not Include Attorneys’ Fees, Fourth Circuit Rules

When a contract provided for the breaching party to pay the non-breaching party’s “legal costs,” the Fourth Circuit determined that attorneys’ fees were not included within this term.  The February 19, 2013 Fourth Circuit decision which vacates the District Court’s calculation of “legal costs” is Traxys North America v. Concept Mining Incorporated.

The dispute involved a coal contract which stated that the breaching party would be obligated to pay “legal costs incurred by [the non-breaching] party.”  Based on this provision, a Virginia Federal District Court awarded the non-breaching party over a half-million dollars in “legal costs,” including prejudgment interest, attorneys’ fees, expert witness fees, and some witness travel expenses.  However, the Fourth Circuit vacated this judgment, stating that it is not “unmistakably clear” that the contract term “legal costs” includes attorneys’ fees.

Since the contract at issue contained a New York choice-of-law provision, the Court applied New York state law when interpreting its language.  Under New York law, fee-shifting provisions are very narrowly construed.  The Court also analyzed the contract under the American Rule, which provides that each litigant is to bear his/her own attorneys’ fees.

The Court stated that it could not infer a party’s intention to waive the benefit of the American Rule, unless such an intention was “unmistakably clear” in the language of the contract.  The term “legal costs” in the contract was undefined, and could encompass or exclude a range of associated litigation fees.  As such, it was not “unmistakably clear” that the parties intended to include attorney’s fees as “legal costs.”  It was also not clear whether the parties intended to include expert and witness fees as “legal costs,” although this was a “closer call” in the Court’s opinion.

The Fourth Circuit remanded the case back to the District Court, directing it to recalculate the “legal costs” awarded in conformity with its decision.