Attorneys’ Fees Clauses:

A Vital Source of Protection for Businesses

One of the easiest steps a business can take to protect itself is to include in its contracts a so-called “attorneys’ fees clause.”  This is a provision stating that in the event a party undertakes legal action to enforce the contract, the prevailing party in the action is entitled to recover its costs and attorneys’ fees from the other party.  The general rule in American litigation is that each side must pay its own lawyers.  The only exceptions are where a statute or contract provides for fee-shifting.  Statutes rarely do.  So a properly drafted attorneys’ fees clause is highly recommended both to facilitate enforcement of the contract and to deter frivolous claims.

Imagine that Party A h
as breached a contractual promise to pay $100,000 to Party B.  Party B can sue to collect the amount owed, but litigation is expensive, time-consuming and distracts from normal business operations.  Even the simplest lawsuit can cost $50,000 or more if taken all the way to trial.  Party A knows this, so in the absence of a fee-shifting provision in the contract, it knows that Party B at best stands to “net” $50,000 after trial, and can use that knowledge to force Party B to accept a much lesser dollar amount in settlement.

A clearly worded attorneys’ fees clause changes the strategic dynamic.  The breaching party knows that if sued, it is likely to pay not only the damages the counterparty has incurred, but its attorneys’ fees as well.  In effect, the breaching party faces the possibility of financing litigation against itself.  There is thus a stronger incentive to act reasonably in settlement negotiations.

An attorneys’ fees clause is also a shield against frivolous lawsuits.  If your contracts include that a prevailing party is entitled to recover attorneys’ fees, counterparties must think carefully about the merits of their case before suing you.  If they sue and lose, they have to pay not only their lawyers but yours as well.

Granted, even a well-crafted attorneys’ fees clause is no guarantee that the prevailing party will recover every dollar it spends on lawyers.  Often they provide that only “reasonable” fees and costs are recoverable, inviting a debate over whether the amount a lawyer billed was in fact reasonable.  In the absence of that qualifier, a court may still decide to exercise its discretion in reducing the amount of fees claimed if the lawyer in question billed excessively.

Nonetheless, an attorneys’ fees clause can be a major source of leverage in settlement negotiations.  As it tends to appear toward the back of most contract forms, amid the “boilerplate” language, it often receives little attention.  Many lawyers do not notice when such clauses are ambiguously worded or even entirely absent.  But they are absolutely crucial to successful resolutions of contract disputes.

If your company needs advice on how to protect itself in the drafting or negotiation of contracts, contact the experienced professionals at Capobianco Law Offices.