Essential Contract Knowledge, Installment 2: Attorneys’ fee & costs provisions

Have you ever had a potential legal claim against someone, but you realized that suing would make no sense because any recovery would not exceed the legal fees and expenses to get the judgment?  Happens all the time in the business world.  In fact, the economics of litigation prevent countless lawsuits every year.

To remove this potentiality, some clever lawyers many years ago invented the “attorneys’ fee” provision for contracts.  This clause comes in numerous variations, but the substance is always the same:  if a lawsuit is filed to interpret or enforce the contract, the loser of the litigation must pay the winner, in addition to any damages, an amount equal to what the winner spent on attorneys’ fees and expenses to get the judgment.  The clause almost always limits the recovery to “reasonable” fees and expenses because that’s what most courts will allow; if an attorney tries to take advantage of the clause and submits supporting documentation that inflates the amount with excessive hours of work or an hourly rate that exceeds the typical rate in the relevant community, the court will not award all of the fees.

My favorite attorneys’ fees clause contains a definition of “prevailing party” so there is clarity on the issue:

If either party institutes a proceeding in court to enforce any provision of the Agreement, or for damages by reason of any breach of this Agreement, then the prevailing party will be entitled to recover from the other party all costs of the suit, including, without limitation, court costs and such amounts as the court may award as reasonable attorney's fees and expenses for services rendered to the prevailing party during the proceedings.

For purposes of the foregoing: (1) "prevailing party" means (a) in the case of the party initiating the enforcement of the rights or remedies, that it recovered substantially all of its claims; and (b) in the case of the party defending against such enforcement, that it successfully defended substantially all of the claims made against it; and (2) if no party is a "prevailing party" within the meaning of the foregoing, then neither party will be entitled to recover its attorneys' fees.

Keep in mind that attorneys’ fees provisions are a double edged sword – you can include one in your contract or insist on adding one in someone else’s contract and have it come back to bite you if you lose in a lawsuit.  Therefore if you are a party who would have an economic advantage over the other party to a contract, you may not want to include one.  

As always, should you have any questions, you can reach me at tmckee@tmckeelaw.com and 615.916.3224.