Attorneys' Fees Clause

I've noticed a recent trend by attorneys, especially younger ones, to always include an attorneys' fees clause in every contract they draft. Whether or not you should do so depends upon the nature of the contract and relative strengths of the parties to the contract. Generally in the United States, a prevailing party in a breach of contract lawsuit cannot recover its attorneys' fees from the losing party - unless the contract specifically allows it to do so via an attorneys' fees clause.

Attorneys' Fees: In any action or proceeding to enforce, preserve, or protect any right or benefit under this Agreement, the prevailing party in each such action or proceeding shall be entitled, in addition to any and all other relief granted by a court or arbitrator, to an award in such action or proceeding of the amount of its attorneys' fees reasonably incurred therein. The "prevailing party" means the party determined by the court to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered.

Absent the above definition of the prevailing party a court might only award attorneys' fees to the litigating party which prevailed on all causes of action. [For example, breach of contract is one cause of action and fraud is another. Multiple causes of action by one plaintiff against one defendant are standard.] Depending on your particular circumstances, the above definition may or may not be preferable.

Who benefits from including an attorneys' fees clause? To determine this, you must consider the different motivations and bargaining positions of the parties to the contract.

For example, in a confidentiality agreement with an employee, it is anticipated that only the employer will be suing to enforce it. Therefore, it benefits the employer, but not necessarily the employee, to include an attorneys' fees clause in the agreement.

Another beneficiary is the party who will seek payment under the contract. Without this clause, to collect small sums ($5,000 to $20,000) owed under the contract, the unpaid party may pay more in attorneys' fees for a collections lawsuit than it may recover upon judgment. This would provide the defaulting party with leverage to force a settlement for less than the full debt.

Yet another beneficiary is the smaller company which contracts with the much larger company. Often the smaller company cannot afford to sue a financially stronger company to force it to perform its contractual obligations unless the smaller company can recover its attorneys' fees.

Who might want to omit such a clause from the contract? A "deep pocket" company which contracts with a small company (one with inadequate capital or with cash-flow problems) might prefer that each party pay its own attorneys' fees regardless of who wins the lawsuit. In this case, without the clause, the poorer company probably cannot afford to sue over a contract breach. (Keep in mind that the breach could be justified or inadvertent. The breaching party is not always a bad guy.)

Without an attorneys' fees clause, pursuing a lawsuit may cost the small company more money in attorneys' fees than any judgment it may obtain. And should it file suit, it will be under greater pressure to accept a low settlement offer as its attorneys' fees continue to mount.

We will discuss other "standard clauses" in future issues of LawVantage.