When does a claim for $50,000 against your business end up costing you two or three times that amount? When you lose the case you’re litigating, in full or in part, and you end up owing years of interest and attorneys’ fees to the other party on top of the underlying claim amount – while also paying your own attorney to defend the claims.

Let’s walk through a real-life example

A new unpublished New Jersey Appellate Division case readily illustrates this problem. R.M.R. Elevator Company, Inc. v. Broad Atlantic Associates, LLC (Docket No. A-2406-20, June 6, 2022), began in arbitration, as required by the parties’ contract to resolve disputes.  The plaintiff elevator company claimed it was owed approximately $50,000 for work performed on several contracts with the defendant commercial building owner. The defendant claimed not only did it not owe the plaintiff any money, but it had been damaged by the plaintiff’s work, so the defendant filed a counterclaim against the plaintiff for $150,000.

About one-and-a-half years after filing its claims in arbitration, the plaintiff ultimately prevailed and was awarded $28,542.65 for its work performed (after a setoff for the defendant), PLUS an additional $16,559.68 in interest (presumably years of interest at a high contractual rate from the time the balance was due), AND $38,289 in attorneys’ fees (as permitted by the parties’ contract to the plaintiff when forced to take action to collect), for a total of $83,391.33. Added to that sum were the arbitration fees and arbitrator compensation allocated against the defendant that increased the total award to $99,566.33 (as an arbitrator in an arbitration is entitled to compensation in the form of an hourly fee).  The defendant’s counterclaim, meanwhile, was denied in its entirety.

Unfortunately, that was not the end of the defendant’s economic pain. When the plaintiff applied to the Superior Court to confirm the arbitration award, the defendant opposed the application and sought to vacate the award. The Court granted the plaintiff’s application, confirming the arbitration award while also ordering the defendant to pay the plaintiff an ADDITIONAL attorney’s fee award of nearly $10,000, thereby bringing the new total amount of the judgment on the award to $109,388.88.

So, a claim that started out at about $50,000 was more than doubled based on fairly standard interest and fee-award contract provisions as well as New Jersey’s arbitration statute (for the post-arbitration fee award). The Appellate Division affirmed the lower court’s award of attorneys’ fees and the arbitration award in full.  As noted, if you add the fees the defendant had to pay to its own counsel, it ultimately would have added up to a minimum of $150,000 – or three times the plaintiff’s original claim – and likely significantly more after factoring in the fees and costs of the appeal.

Lesson learned

“Be careful what you wish for” in litigating a dispute. Even if you feel strongly about the merits of your own defenses and counterclaims, you simply never know how a case will play out and the potential downside could be significant. Conversely, if you are seeking collection of a debt, even if it takes years, you could possibly hit a home run, leaving you fully compensated for all fees and costs incurred, as well as for the loss of the use of your money – in the form of substantial interest – but, even assuming you fully prevail, it may take years to obtain any award or judgment, all while you are spending substantial out-of-pocket litigation costs as you go.  And, of course, actually collecting on any award and judgment you obtain may present a whole other complicated set of issues and challenges.

The bottom line

Settlement should always be an option to consider both before and after a litigation has been commenced – whether in arbitration or in court – for both sides of a dispute.  And the earlier you attempt to come to a resolution, the less you will have spent in litigation and the more likely you may end up with a settlement you can live with to put the dispute behind you (and without risking the nightmare scenario discussed above).  Ultimately, the decision to settle a dispute or litigate it to a final resolution is a business decision best made thoughtfully, dispassionately, and in the best interests of the business, in consultation with your attorney.