The notion of the concept of “attorneys fees” sounds so self-serving coming from the fingertips of this small business lawyer. The thing is, if a contract has a fair-and-balanced “attorneys fees provision” in it, such a clause greatly reduces the risk of a long, expensive and protracted lawsuit in a dispute. Furthermore, it greatly increases the chances the other party will settle a dispute reasonably, instead of squatting on an intractable and indefensible position just to be a jerk, provided it’s worded in your favor.
Therefore, as a business owner, you owe it to yourself to at the very least make sure that if there’s an attorneys fees provision in a contract, that it’s not against you. If there’s no attorneys fees provision, that’s better than one that works against you.
What is an Attorneys Fees Provision?
Simply put, an attorneys fees provision is a clause in a contract that awards “legal expenses, including attorneys fees and court costs, to the prevailing party,” in the event of a dispute or lawsuit between the parties. It’s that simple.
Disputes can arise for all sorts of reasons, including but not limited to:
- You cannot continue to perform on the contract, and the other party sues for damages or specific performance
- The other party breaches the contract, and you sue for damages or specific performance
- A disagreement in the level or sufficiency of performance (i.e. amount of money that needs to be paid, or the level or quality of products or services)
- A party violates a specific restriction in the agreement (i.e. the parties are generally performing, but one of the parties is doing something they aren’t supposed to — such as violating an exclusivity arrangement, or non-solicitation requirement)
- And more
One way to help reduce the chance of disputes, is to make sure you have specific, measurable, realistic, time-bound objectives and requirements in your contract. Read our previous blog article entitled, S.M.A.R.T. Goals are Smart to Have, for more information.
If a dispute does develop, an attorneys fees provision permits the victor to a legal dispute involving a contract to request reimbursement for their legal expenses. “Legal expenses” can be phrased in a number of ways, aside from just “legal expenses.” Common versions include “collection costs”, “enforcement costs”, and “expenses associated with a breach”.
Make Sure it is Not Working Against You
If attorneys fees are only available to the other party to the contract, then they work against you. YOU NEVER WANT TO SIGN A CONTRACT THAT HAS AN ATTORNEYS FEES PROVISION FOR THE OTHER PARTY ONLY. Never sign contracts that gives the provision to the other party only. Even worse, are clauses that award the other party, no matter what (i.e. they can ask for attorneys fees, even if they lose or it’s their fault).
Ideally, an attorneys fees provision would be mutual. A mutual contract provision means it applies to both parties in the same way. You only want to agree to a contract if it gives YOU THE RIGHT TO COLLECT ATTORNEYS FEES. This means the provision must either be mutual or in your favor.
An example of a mutual clause is as follows:
The prevailing party in any suit or action hereunder shall be entitled to recover from the losing party all costs incurred by it in enforcing the performance of, or protecting its rights under, any part of this Agreement, including reasonable costs of investigation and attorneys’ fees.
Examples of BAD clauses include the following:
Contractor hereby agrees to indemnify Property Owner for any and all expenses (including attorneys’ fees and non-reimbursed charges) arising directly from Contractor’s breach of this Agreement or Property Owner’s enforcement of this Agreement.
Why? Because only the Property Owner gets its legal expenses paid.
In the event of any litigation between the parties, the Landlord shall be entitled to its attorneys’ fees, costs and expenses.
Why? Because only the Landlord gets its legal expenses paid, regardless of whether the Landlord is at fault or looses its case.
A competent business attorney can sift through the legal cabbage that is your contract, to help you understand what works for you and against you. There is no substitute for seeking the advice of a competent business lawyer when dealing with an important contract for your business.
Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later. A Slingshot company.
I was horrified to find one of these one-sided clauses in an offered employment contract of all places recently – i.e. the employee would have to pay the legal fees for both sides in any dispute, regardless of merit or outcome! The only excuse offered was that the clause said they could recoup “reasonable” fees, and that made it OK – of course, no provision for reciprocity which could have made it genuinely reasonable.
To be honest I’m surprised and disappointed such a clause would even be legal in the US, but perhaps it serves a valuable function in warning people away from companies that would try to use such clauses?
Just be glad you saw it and recognized it for what it is.
Frankly, I think they are great clauses — when mutual, not one-sided like what you mentioned — because it generally encourages folks to act in good-faith (otherwise, they risk paying the legal fees of the other side).
When I’m dealing with a dispute, and the contract does not address attorneys fees, I often find the other party (assuming they have a bit of money) will not always act in good-faith (especially if they know or believe my client to not have much surplus cash laying around).