Beware of Mutual Demand for Attorneys’ Fees in Arbitration Proceedings in Jurisdictions (Such as New York) Which Permit Award in the Absence of Statute or Agreement if Both Parties Demand Fees

It is well-known that, generally, an arbitrator may award attorneys’ fees where the award is authorized by statute or where the parties have agreed that the prevailing party is entitled to fees. Nonetheless, parties in an arbitration often include a demand for attorneys’ fees as a matter of course even where neither circumstance exists. Depending upon the jurisdiction, this practice may have a negative impact.

An unpublished New York state court ruling earlier this year serves as a reminder that such a demand may have potentially unintended consequences in some jurisdictions.  Specifically, in New York, a mutual demand for attorneys’ fees may amount to an agreement by the parties for a fee award in an arbitration. In New Jersey, however, an agreement for the award of fees must be express and will not be implied by a mutual demand in the arbitration proceedings. At least in New Jersey, this is true even though the governing arbitration rules may expressly provide for a fee award where both parties have made a demand for attorneys’ fees. Indeed, many arbitration rules, including the AAA rules for commercial, construction, and insurance disputes expressly provide for a fee award where both parties have made a demand for attorneys’ fees, even in the absence of a prevailing party provision in the parties’ arbitration agreement.

Given these rules and the possibility that jurisdictions may, like New York, permit an arbitrator to award of fees based upon the parties’ mutual demand, parties should remain cognizant of this potential pitfall and carefully consider whether to include a demand for attorneys’ fees in an arbitration.

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