A recent Delaware decision brings into focus the issue of whether entrepreneurs can provide for fee shifting in intra-entity disputes as part of the private law governing the business. New Jersey disfavors the shifting of attorney fees, a position consistent with the “American Rule,” under which each litigant generally must pay its own attorney fees and costs. This is distinguished from a “loser pays” system, the rule extant in the civil courts of much of the rest of the industrialized world, including the courts of England.
Even under the American Rule, however, to discourage litigation between parties to commercial contracts, transactional lawyers often include a “loser pays” provision in the agreement. Although strictly construed, these contractual provisions have been held valid and enforceable. Would a loser-pays provision incorporated into a document governing a business entity be valid? As to Delaware, the Delaware court answered that question “yes, maybe.”
The Delaware Case
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