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A Rose By Any Other Name Might Not Smell As Sweet After All

A former U.S. President was widely ridiculed for saying that the answer to a question depended “on what your definition of ‘is’ is.”  In its April 27, 2017 decision in Under Armour, Inc. v. Ziger/Snead, LLC, the Maryland Court of Appeals demonstrated that the Executive Branch does not have a monopoly when it comes to parsing words.

Under Armour entered into a contract with architect Ziger/Snead, LLP under which Ziger was to design a Visitor’s Center at UA’s Baltimore corporate campus.  UA withheld payment of $56,249 of Ziger’s fee.   Ziger sued UA to collect the unpaid balance of its fee plus accrued interest.   Ziger also sought to recover additional amounts under a Section 11.10.2 of the contract which provided for Ziger to recover “attorneys, fees, costs, expenses, and losses” if it employed counsel to enforce the contract.  UA counterclaimed against Ziger, asserting substandard design work and inadequate project management.

The contract provision relating to recovery of attorneys’ fees, costs, expenses, and losses did not expressly condition Ziger’s right to recover on winning a lawsuit, but simply on Ziger engaging an attorney to enforce the contract.  However, the parties agreed before trial that the provision should be treated as a “prevailing party provision.”  Because a party must first win on its underlying claims before it can recover additional amounts under such a provision, the applicable Maryland Rule provides that the judge is to hear evidence and determine the additional amounts recoverable only after a jury or the judge has determined that the party seeking to enforce the prevailing party provision has prevailed on the underlying claims.  Notably, that Rule applies only to “a claim for an award of attorneys’ fees attributable to litigation…pursuant to a contractual provision permitting an award of attorneys’ fees to the prevailing party.”

A jury found in favor of Ziger and awarded Ziger a judgment against UA for $58,940 in damages.  After the jury ruled in Ziger’s favor, the judge then awarded  $182,735 in attorneys’ fees, $155 in costs, $42,830 in expenses (consisting mostly of mediation, deposition, and copying costs), and $62,190 in “losses.”  The $62,190 “consisted entirely of the value of the time expended by Mr. Ziger, a principal in the firm, and several employees of the firm, on matters related to the enforcement of the contract, including investigation of the matter and performing litigation-related tasks at the request of Ziger’s attorneys.”  The hours spent by Ziger employees on those tasks were tracked and Ziger was awarded what it would have been paid by other clients if it had billed them for the same number of hours at its standard hourly rates.

UA paid the judgment except for the $62,190 in losses and appealed that part of the judgment to the Court of Special Appeals. UA did not challenge whether Ziger personnel had spent the hours claimed or the reasonableness of the hourly rates.  It argued that time spent by Ziger personnel simply was not covered by Section 11.10.2 of the contract.

In many countries, a party who wins a lawsuit may recover its attorneys’ fees and litigation expenses from the losing party.  However, under what is referred to as the “American Rule,” a litigant in the U.S. must bear its own attorneys’ fees and expenses unless either a statute or a “fee shifting” provision in a contract entitles it to recover them from its adversary.  Because fee shifting provisions are exceptions to the American Rule, such provisions are narrowly construed.  Relying on these concepts, UA argued that Section 11.10.2 of the contract had to be narrowly construed because it covered attorneys’ fees, costs, and expenses.  Since Section 11.10.2 said nothing about staff time, UA argued that the trial court had incorrectly awarded Ziger $62,190 for time spent by employees on the litigation.

The Court of Special Appeals acknowledged that UA was correct that contract provisions governing recovery of attorneys’ fee and expenses must be narrowly construed because they are exceptions to the American Rule.  However, that Rule only governs the recovery of attorneys’ fees and expenses.  Contracts providing for the recovery of things other than attorneys’ fees and expenses do not have to be construed narrowly.

The Court noted that most of the contract between UA and Ziger was based on a form contract drafted by the American Institute of Architects.  Section 11.10.2, however, was a non-standard addendum which, in the words of the Court, “was an addition negotiated by sophisticated business entities.”  Reciting the common rules of contract interpretation that no term of a contract should be treated as superfluous and that courts should give “effect to every clause and phrase, so as not to omit an important part of the agreement,” the Court said that UA’s characterization of Section 11.10.2 as an attorneys’ fee and expense provision violated those rules.  Section 11.10.2 provided that if Ziger employed an attorney to enforce its contract with UA, Ziger could recover “attorneys’ fees, costs, expenses, and losses incurred by Architect prior to and through any trial . . . relating to such enforcement.”  UA’s interpretation gave no meaning to “losses incurred by Architect.”  Since “losses” had to mean something other than attorneys’ fees and expenses, that term did not have to be narrowly construed.

The Court said that “unlike attorneys’ fees and costs, the word ‘losses’ is a general term that legitimately can cover a variety of things.”  Citing a Random House Dictionary definition of “loss” as “detriment, disadvantage, or deprivation from failure to keep, have, or get,” the Court said:

Diverting a total of more than 300 hours of their time at hourly rates ranging from $100 to $200 from income-producing work to assist counsel in preparing a lawsuit to collect wrongfully withheld fees and defending against a meritless lawsuit by appellant certainly constitutes a measure of “injury” or “harm” incurred by the firm, not to mention a “detriment,” “disadvantage,” or “deprivation from failure to keep, have, or get.”.

The Court’s references to “wrongfully withheld fees” and “defending against a meritless lawsuit” suggest that its decision may have been colored by its view of UA’s conduct.  An issue relegated to a footnote in the Court’s opinion reinforces that inference.  Section 11.10.2 was not the only negotiated addendum to the contract.  Another provision limited the “damages” that Ziger could recover from UA if UA breached the contract to the fee for which Ziger had agreed to perform its services except in the case of “fraud or willful or criminal conduct.”   Consequently, Ziger could not have recovered its “losses” as “damages.”  In the end, Ziger was allowed to recover for “losses” attributable to the time that its employees devoted to the litigation with UA under a procedure expressly applicable only to “an award of attorneys’ fees” because the “losses” were not attorneys’ fees and because they were not subject to the contractual limitation on the recovery of “damages.”

Perhaps the most telling passage in the opinion is the Court’s statement that “Certainly, had the contract before us mentioned staff time, either as an inclusion or an exclusion, the issue before us would not be presented.”  As UA learned, not expressly addressing an issue in a contract can have expensive consequences.