For Want of a Word: Be Careful When Drafting!

October 4, 2023 - Most language we fight about when negotiating complicated contractual arrangements never leads to an expensive courtroom dispute. But, every once in a while, we receive a scary reminder that every word can count for your client…

A “collection” provision of a 2020 License and Settlement Agreement between Honeywell International and OPTO Electronic Company provided that, “[i]n the event a Party must institute an action to collect any overdue payments, that party shall be entitled to its fees and costs incurred with respect to such action.”   On September 27, 2023, the United States District Court for the Western District of North Carolina found – no doubt to Honeywell’s unwelcome surprise – that this provision did not entitle Honeywell to recover its legal expenses following a payment collection dispute with OPTO, relying mainly on the fact that the contract language at issue referred to “fees” generally, and not “attorneys’ fees” or “legal fees.” 

In Honeywell International Inc. v. OPTO Electronics Co., LTD., No. 3:21-CV-00506-KDB-DCK (W.D.N.C. 2023), the parties engaged in extensive litigation regarding whether Honeywell was owed royalties on certain products sold by OPTO under the parties’ License and Settlement Agreement. Honeywell prevailed in both jury and bench trials; while the District Court chose to not disturb those verdicts, it showed some sympathy to OPTO’s arguments on the merits, which may have played a role in its denial of Honeywell’s request for an award of attorneys’ fees.¹

To make its determination, the court undertook extensive analysis of Delaware law regarding awards of attorneys’ fees. The court noted that, under Delaware law, the “‘“basic point of reference’ is the bedrock principle known as the ‘American Rule’ whereby each litigant pays its own attorneys’ fees, win or lose, unless a statute or contract provides otherwise.” Donnelly v. ProPharma Grp. Topco, LLC, No. CV 21-894-MAK, 2023 WL 5528613, at *6 (D. Del. Aug. 28, 2023) (quoting Peter v. Nantkwest, Inc., 140 S. Ct. 365, 370, 205 L.Ed.2d 304 (2019)).’”

The court found that Honeywell bore the burden of showing a clear agreement to shift its attorneys’ fees onto OPTO.  To start, the court looked to other references to fees in the License and Settlement Agreement that included the word “attorneys’” before the word “fees.” It found specific references in two other provisions in the Agreement – a section focused on each party bearing its own costs, expenses and attorneys’ fees in connection with settling prior disputes and entering into the Agreement, and an arbitration provision that required the loser to pay the prevailing party’s reasonable attorneys’ fees and costs. The court did not clarify what kind of fees it viewed as properly reimbursable under the collection provision, apparently because that provision did not specifically reference “attorneys’ fees” or “legal fees.”  Instead, the court merely decided that the simpler (and potentially broader) reference to reimbursement of “fees and costs” in the collection provision at issue did not entitle Honeywell to reimbursement for attorneys’ fees it incurred in connection with collecting overdue payments. The court based its finding, in part, on the fact that Honeywell had sophisticated counsel, which knew to include the term “attorneys’ fees” when it wished to do so. (Although one could argue that the more limited references to “attorneys’ fees” and “legal fees” occurred outside of the collection/breach context, where broader protection in the parties’ agreement was deserved.)

After finding the term “fees” as used in the collection provision ambiguous in respect of attorneys’ fees, the Honeywell court considered extrinsic evidence in its determination. Under Delaware law, when a court finds a contractual provision to be ambiguous, extrinsic evidence is admissible to determine the parties’ contractual intent. Where a provision of a contract is ambiguous, the contract is not fully integrated and therefore evidence outside the contractual terms may be considered to derive the meaning of those terms. (The court noted that it would have reached the same result had it not considered extrinsic evidence.)

The Honeywell court also focused on the absence of “prevailing party” language in the contractual collection provision, relying on Murfey v. WHC Ventures, a case where a general partner sought to shift to one of its limited partners its attorneys’ fees incurred in direct litigation with that limited partner. In Murfey, the partnership had a specific prevailing party fee-shifting agreement in the event of an arbitration, but otherwise did not provide for any fee reimbursement. The general partner attempted to rely on language in the profit/cost allocation provisions that allowed the allocation of expenses, liabilities or contingencies to particular partners to the extent equitably attributable to those partners, and similar special allocations without reference to disputes with the partnership itself.  The court relied on Murfey’s holding that there must be specific language in regard to a prevailing party, which is considered a “hallmark term of fee-shifting provisions.” Murfey v. WHC Ventures, LLC, 2022 WL 214741, at *2 (Del. Ch. Jan. 25, 2022). Since there was no reference to a “prevailing party” in the collection provision before it, the Honeywell court determined that the parties did not show their clear intent to allow reimbursement of Honeywell’s attorneys’ fees.²  The collection provision at issue focused on the reimbursement of fees and costs incurred in connection with an action to collect overdue payments (which by its terms required Honeywell to prevail in proving such payments were owed and overdue). The Honeywell court’s focus on the lack of the phrase “prevailing party” appears overstated, as evidenced by a recent Delaware court decision disregarding the absence of such language in awarding attorneys’ fees as part of an indemnity judgment. See Schneider National Carriers, Inc. v. Kuntz, 2022 WL 1222738 (Del. Super. April 25, 2022). 

Although the court’s reasoning in Honeywell is debatable – it is not certain that a Delaware court would rule the same way or that this decision would survive an appeal – the case still serves as a cautionary tale on the importance of clear drafting. When drafting provisions in an agreement, and especially with respect to fee-shifting under Delaware law, practitioners should leave no room for ambiguity or inconsistency.  Had the contract drafters in Honeywell referred to “attorneys’ fees” or “legal fees” instead of just “fees,” (or better yet, referred to “fees (including attorneys’ fees)”), the Honeywell court would likely have sided with Honeywell.