Enforceability of attorneys’ fee provision in employment contract under Texas law

Author: LegalEase Solutions 

Short Question

Whether the attorneys’ fee provision in the Milligan’s employment contract is enforceable under Texas law, or potentially unconscionable?

Introduction

Texas is an American Rule state; that is, unless a statute or contract provides for the recovery of attorney’s fees, each party to a civil case bears his own fees. “Attorney’s fees may not be recovered unless provided for by statute or by contract between the parties”. New Amsterdam Casualty Co. v. Texas Industries, Inc., 414 S.W.2d 914 (Tex.1967).  In Dallas Cent. Appraisal Dist. v. Seven Inv. Co., 835 S.W.2d 75, 77 (Tex.1992) it was held that a party may recover attorney’s fees only if provided for by statute or by contract.

Discussion on unconscionability of an agreement

In general, an agreement to arbitrate is valid and enforceable, unless some ground exists at law or in equity for the revocation of any contract, such as fraud or unconscionability. In re Border Steel, Inc., 229 S.W.3d 825 (Tex. App. 2007).  As a matter of fact, “unconscionability” is a term used to describe a contract which is unfair because of its overall gross one-sidedness or the gross one-sidedness of one of its terms. Currey v. Lone Star Steel Co., 676 S.W.2d 205 (Tex. App. 1984). The Milligan employment agreement states in relevant part:

“If any party commences litigation in violation of this agreement, or refuses or neglects to timely submit to arbitration in accordance with this agreement, such party shall reimburse the other party for costs and expenses, including attorney fees: (a) incurred in seeking abatement or dismissal of such litigation; or (b) incurred in judicially compelling arbitration.”

Allowing both parties to recover fees, as stated in the above arbitration clause, hardly makes an agreement ‘one-sided’.  Such agreements are common in commercial contexts.  Here, the arbitration clause allowed the prevailing party to recover attorney’s fees and so is not unconscionable. Courts have held that whether or not the attorney’s fees and costs provisions are substantively unconscionable and render the arbitration agreements unenforceable as a whole involves the threshold issue of arbitrability. Sec. Serv. Fed. Credit Union v. Sanders, 264 S.W.3d 292, 298 (Tex. App. 2008).

However, the attorney fees’ clause in the agreement (clause 8.8) is different. It states:

“If MID is a prevailing party in any legal or arbitration proceeding arising out of or relating, directly or indirectly, to this Agreement, MID shall be entitled to recover from Employee all costs of such proceeding, including reasonable attorney’s fees: MID shall be considered a prevailing party when MHI: (i) successfully prosecutes an action against Employee; or (ii) successfully defends against an action brought by Employee or by Employee’s heirs or legal representatives.”

Here only MHI is allowed to recover from the Employee all costs of proceedings and attorney fees.  Generally, a contract is unconscionable if, given the parties’ general commercial background and the commercial needs of the particular trade or case, the clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract. In re Olshan Found. Repair Co., LLC, 328 S.W.3d 883 (Tex. 2010).

Under Texas contract law, courts may properly decline to enforce a contract, or a provision in a contract, on the ground that it is against public policy and therefore substantively unconscionable.  A contractual provision is against public policy, and thus unenforceable, when it is illegal or inconsistent with the public’s best interest. Serv. Fed. Credit Union v. Sanders, 264 S.W.3d 292 (Tex. App. 2008).  It is also stated that severability of an illegal or unconscionable provision in a contract is determined by the intent of the parties as evidenced by the language of the contract. Id

There are two categories of unconscionability defenses: (1) procedural unconscionability, which refers to the circumstances surrounding the adoption of the contract, and (2) substantive unconscionability, which refers to the overall fairness of the contract itself. Sec. Serv. Fed. Credit Union v. Sanders, 264 S.W.3d 292 (Tex. App. 2008).

In Sec. Serv. Fed. Credit Union v. Sanders, 264 S.W.3d 292 (Tex. App. 2008), it was held that attorney fees provisions in credit union’s arbitration agreements were unconscionable and unenforceable as they improperly limited account holders’ rights to attorney fees under the Deceptive Trade Practices-Consumer Protection Act (DTPA).

Substantive unconscionability refers to the fairness of the arbitration agreement itself.  The test for substantive unconscionability is “whether, given the parties’ general commercial background and the commercial needs of the particular trade or case, the clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract.” If the agreement ensures preservation of the substantive rights and remedies of the parties, the agreement is not substantively unconscionable. Venture Cotton Co-op. v. Freeman, 395 S.W.3d 272, 274 (Tex. App. 2013).  In this case, the court has also held that arbitration agreement between cotton farmers and cotton cooperative was substantively unconscionable because that it prevented farmers from recovering statutory remedies. Venture Cotton Co-op. v. Freeman, 395 S.W.3d 272 (Tex. App. 2013).

The case that was closest to the factual context of this is Venture Cotton Co-op. v. Freeman, 395 S.W.3d 272 (Tex. App. 2013). In Venture, the court considered a similar as in the instant scenario.  The court held that the provisions as to the recovery of attorney’s fees are unconscionable as the arbitration agreement allowed Venture to recover attorney’s fees if appellees breached the contract, but does not allow appellees to recover if Venture breached.  Since the arbitration agreement allows only Venture to recover attorney’s fees, as in the employment agreement herein, the agreement is “one-sided.”

Similarly, in the instant case, the attorney fees’ clause in the Employment Agreement allows only MHI to recover attorney fees if the employee breached their contract, but it does not allow employees to recover if MHI breached the contract. This speaks to potential substantive unconscionability. With respect to procedural unconscionability, the fact that this an employment contract and that employees often are faced with a “take it or leave it” approach when it comes to employment agreement, perhaps an argument can be made that the situation presents a contract of adhesion. This may not be far-fetched. Afterall, the Acosta court held that a certain employment contract containing an arbitration agreement as a procedurally unconscionable contract of adhesion. Acosta v. Fair Isaac Corp., 669 F. Supp. 2d 716 (N.D. Tex. 2009),

Conclusion

The attorneys’ fee provision is enforceable under Texas law, if provided by the statute or by contract between the parties.  The MHI employment contract clearly provides for the attorneys’ fees per contract. However, Texas state law also provides that contractual clauses should not amount to substantive unconscionaiblity and contravene public policy. The scenario before us presents various grounds for possible arguments against application of the attorneys’ fees provision.  The MHI agreement is a one-side agreement that allows only MHI to recover attorney fees.  Furthermore, given this is an employment contract and the relative weakness of employees as relates to their employers, provides further support of a claim of substantive unconsctionability. It doesn’t appear employees had the option to negotiate their employment agreements.