Fee-Shifting Effect Of Choice-Of-Law Clauses

It is common practice in commercial transactions to agree that the law of a particular jurisdiction will govern the parties' contract and to memorialize that agreement in a choice-of-law clause. In negotiating for such clauses, parties normally recognize and expect that if their contract becomes the subject of litigation, the law on which they agreed will, subject to certain exceptions, govern the resolution of the contract claims. However, it may not be widely known that the choice-of-law clause could make the party that loses the litigation liable for the attorney fees of the winning side, in contrast to the usual rule in the United States that the prevailing party cannot recover its attorney fees unless the contract has an express fee-shifting provision or a statute applies that permits such recovery. Unlike the United States, most Western legal systems follow the "English Rule," which requires the losing party to pay the prevailing party's reasonable attorney fees.1

Courts Holding That a Choice-of-Law Clause Imports the English Rule

Several U.S. decisions have held that a prevailing party may be entitled to attorney fees where the applicable choice-of-law clause selects the law of an English Rule jurisdiction. In doing so, those courts have adopted varying rationales.

First, some courts treated the applicability of the English Rule as a typical choice of law question and looked to the conflict of laws rules of the relevant forum. For example, in RLS Associates v. United Bank of Kuwait, the Southern District of New York held that the English Rule applied in an action brought by a U.S. company against a London-based bank in connection with a set of consultation agreements.2 The agreements provided that they "shall be governed in accordance with the laws of England."3

To find that the English Rule applied, the court began by recognizing that "contractual choice of law clauses only apply to substantive issues," and not to matters of procedure.4 Sitting in diversity, the court then examined New York's rules on conflict of laws to determine whether attorney fees should be treated as substantive or procedural. The court noted that whether English law considered attorney fees procedural was not controlling; rather the issue was whether the English Rule "would be considered procedural under New York law."5

Because no New York case appeared to have directly addressed that issue, the court turned to "general principles of substance-procedure analysis followed by New York courts" and, based on...