Contractors have a number of concerns when facing a lawsuit. What worries many contractors is the cost of attorney fees.

Whether you are considering a lawsuit to collect on a claim or you are being sued, the expense of litigation can be high. Often what drives this cost is not the trial itself. Pretrial discovery, which includes document production, interrogatories and depositions, is usually the main ingredient to this expense. I am regularly asked how much it will cost and if attorney fees can be recovered from the other side.

The American rule

Our legal system does not normally allow for a party to get its attorney fees reimbursed. There are historic and social welfare reasons for this rule, mainly based on a philosophy of not creating barriers to a person’s ability to sue and enforce his or her rights. To obtain repayment for these fees, a statute would have to exist to allow for such recovery—and there are some—or the right of recovery has to be expressly built into the parties’ contract.

It is becoming more common for companies to have a recovery of attorney fees clause in their standard contracts. There is a certain superficial appeal to having such a clause, but is it a good idea?

The terms of the clause

The party that drafts the contract is likely to be the one to insert a recovery of fees provision. When that happens, the clause may be of a one-way variety: the owner will have language that it can recover its attorney fees, but you cannot.

If you see this form of the clause, consider deleting it. You may, however, want to go a different route and have the clause be bilateral, meaning it can apply to either party.

What language should be in the clause? You probably want it to contain something along the lines of “the winning party gets reimbursed.” That wording is somewhat vague. Another approach is to state that the “prevailing party” gets the other party to pay its attorney fees. In many ways, this is no less vague and unpredictable.

The prevailing party

Assume you have a clause in your contract that states, in litigation or arbitration, the prevailing party will recover its attorney fees. What does this statement mean?

For example, a general contractor sues an EC for $2 million, and after trial, it recovers only $500,000. Did the GC prevail? Or, because the EC defeated $1.5 million in claims, did it prevail?

Another example: One party has 50 claims, but two of them represent 80 percent of the total. Does winning on those two and losing on the other 48 mean the party prevailed or that the party defeating 48 out of 50 claims is the one who should get their attorney fees paid?

Courts and arbitrators are so used to the American rule that they have difficulty finding that either party prevailed because, by such a ruling, the court or arbitrator would have to break tradition and award fees. As a result, the concept of who prevailed can become philosophical and include considerations beyond just whether one party was awarded money.

The effects on negotiations

It may be human nature, but somewhere along the way in trial preparation, most parties and their attorneys become convinced of the rightness of their claims and are confident they will win. With that mindset, the parties are more willing to invest in the cost of their litigation or arbitration.

Consider the effect of a recovery of an attorney fees clause on negotiations in these circumstances. Each party has invested potentially large sums in trial preparation and will want those amounts factored into any proposed settlement.

On the other side of the coin, if you are the one being sued and you think a loss at trial could be amplified by having to pay the other side’s attorney fees, you may be more willing to make concessions on perfectly legitimate defenses simply to avoid the risk.

In either case, the attorney fees consideration may end up having a greater influence on settlement negotiations than it should and divert attention away from the core issues of the disputes.

Keep in mind that courts retain the power to determine whether attorney fees to be awarded were reasonable. It is not uncommon for a judge to substantially reduce the amount of attorney fees that are requested even if the judge finds that one party prevailed.

Seen elsewhere

So far, this discussion has focused on the use of an attorney fees clause where there is the potential for disputed claims. Other appearances of the clause are more commonly found where there is no dispute over the amount involved in the lawsuit or arbitration.

When parties have resolved their dispute through a settlement agreement, with or without a promissory note attached, the party to be paid will want to insert language that, in the event of default in payment, the defaulting party must pay for collection costs, including attorney fees.

A clause for recovery of collection costs is also prevalent in many supply purchase orders. In these instances, the direct benefit of the attorney fees clause, and the added incentive to make a prompt payment, is obvious. There is no “prevailing party” problem in these situations.

Similarly, some state laws allow for recovery of collection costs including attorney fees on “debts.” You will need to consult your state’s laws on this point.