Builders and Contractors Exchange
Weekly Bulletin: 10 Oct 2005
Don't Lose When You Win: Attorney's Fees Clauses In Contracts
By: Christopher Ambrosio
Generally speaking, in the American legal system, each party must pay for its own attorney's fees and court costs, regardless of which party wins or loses the litigation. The practical effect of the American rule is that many contracts go unenforced and many debts go uncollected because the expense of the litigation, even if successful, outweighs any potential recovery.
However, parties to a contract may avoid the American rule and agree to shift the burden of legal expenses if litigation should arise. (Under some laws, including certain government procurement statutes, the prevailing party may recover its attorney's fees even if there is no contractual provision on the subject.)
In any contract where one party (the "obligor") is expected to pay money to another party (the "obligee"), either to repay a loan or to pay for goods or services, it is wise for the obligee to include a provision requiring the obligor to pay attorney's fees and court costs if collection proceedings are brought. In some contracts, the attorney's fees clause is mutual, i.e. the losing party, whoever it is, must pay the prevailing party's attorney's fees and court costs.
Generally speaking, a party may only recover "reasonable" attorney's fees, regardless of the language in the contract. Reasonableness is determined by the trial court by assessing factors such as the amount of time spent by the attorneys, the complexity of the case, and the market rates for similar legal work in the local jurisdiction. Thus, a particular percentage or dollar figure in an attorney's fees clause will serve as a starting point for the trial court, but will not be binding.
There are nuances to drafting attorney's fees clauses. For example, does the party receiving the fee award have to prevail on all points in the litigation? Does the fee award cover legal expenses incurred in the entire transaction, or only those incurred after litigation arises? Does it cover legal expenses incurred on appeal?
Thus, in order to be effective, attorney's fee clauses should be drafted with the assistance of legal counsel. If done properly, such provisions can make collecting small debts worthwhile and can also serve as a deterrent for the other party to breach.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.