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It has become almost standard in business contracts to incorporate a provision requiring the losing party to pay the prevailing party’s attorney fees and expenses in any dispute arising out of the contract. Attorney fee provisions have their place, but are not appropriate in every agreement.
Start with the premise that any dispute resolved without the involvement of attorneys is best for all parties concerned (excluding, of course, the attorneys). Litigation is almost always damaging to both sides in terms of time and financial resources consumed. The idea and purpose of attorney fee provisions is to make each side think twice about pursuing litigation, because the risk of losing includes not only liability to the other party for any legal remedy, but also for the other side’s legal fees.
Attorney fee clauses have several benefits. Attorney fee provisions can promote recovery of unpaid accounts receivable. Where the outstanding amounts do not substantially exceed anticipated legal fees and costs, an attorney fee provision can change the economic balance and promote recovery efforts.
Attorney fee provisions help deter frivolous claims. Plaintiffs are unlikely to raise questionable claims to merely harass the defendant if they will have to pay for the defense of the claims as well as their prosecution. Attorney fee provisions can also be helpful where there is a substantial difference in resources between the parties to a contract. Where one party has limited financial resources, an attorney fee provision helps protect that party from being buried in legal fees in the face of an obvious breach by a financially advantaged party. This is really a subset of frivolous claims, where the at-fault party frivolously defends in order to put the screws to the plaintiff. The big guy can’t simply litigate his way out of liability for a breach. Where liability is clear, an attorney fee provision can promote settlement of disputes because the liable party has no interest in compounding its woes by paying both sides to litigate further.
Where the parties to a contract are relative equals in terms of sophistication and resources, however, attorney fee provisions can pervert the dispute resolution process. This is particularly true in close cases where the legal and/or factual issues are hotly contested. In such instances, an attorney fee provision can actually work to perpetuate litigation that is damaging to both sides. The prospect of recovering attorney fees can drive the litigation forward until the fees on each side overwhelm the economic value of the underlying dispute. At play in this “litigation momentum" is the fact that in close cases, both sides believe that they will prevail. Because they believe they will recover attorney fees and expenses as well as whatever remedies are available at law, the parties authorize more aggressive (i.e. expensive) litigation efforts than they might if they had to pay their own way.
Cases of clear liability do not frequently result in extensive litigation. The type of dispute that is most likely to involve attorneys is one wherein the circumstances present no obvious liability. This is precisely the type of dispute that can result in extensive, expensive litigation. This is also the type of dispute in which an attorney fee provision can promote, rather than discourage, the perpetuation of litigation.
Another disadvantage of attorney fee provisions arises in cases of insured losses. In situations where a claim may be covered by insurance (such as professional liability), the voluntary contractual assumption of liability for attorney fees and costs may not be covered unless you would be legally liable for those amounts in the absence of the attorney fee provision (e.g., pursuant to a statute that mandates an attorney fee award).
Frivolous lawsuits are far less common than commonly believed. Litigation generally occurs in close cases where liability is unclear. Before agreeing to (or insisting upon) an attorney fee provision in any contract, you should carefully consider the relative sophistication and resources of the contracting parties. You should also consider whether you and your bargaining partner(s) are willing to take on the risk that a dispute requiring litigation could result in an attorney fee award that may overwhelm the value of the underlying dispute. If you want to use an attorney fee provision, you may want to consider limiting its application only to disputes over billing and payments.
Janus was the patron of economic enterprises, frequently used to symbolize change and transition such as the progression of past to future, of one condition to another, of one vision to another. Attorney fee provisions promote both benefits and burdens. Their use should be subjected to careful consideration of past and future dealings of the parties, and of the benefits and burdens they entail.