by Samuel K. Darling, Business Lawyer at Genesis Law Firm
You’ve probably seen attorney fee provisions in contracts. They’re often marked bold with the label “Attorney Fees” or “Prevailing Party” followed by text stating “In the event of a dispute regarding this contract, the substantially prevailing party will receive an award of its attorney fees.” These clauses come in many forms and can be full of legalese. What they have in common: They say one party will pay for the other’s lawyers if something goes wrong with the contract. If you’re reading this article, you’re probably wondering, should I include a fee provision in MY contract? The answer can be counterintuitive. This article will explain what most readers need to know, at least under the laws of Washington State, where our firm is located.
I. American Rule of Attorney Fees. Without a fee clause each party generally pays its own legal fees if a contract dispute arises. It typically doesn’t matter who wins the lawsuit – each party pays its own counsel and court-related costs. This is called the American Rule of attorney fees. The American Rule contrasts with the English Rule, which traditionally requires the loser to pay for the winner’s lawyers.
II. Counter-Intuitive Result. At first glance, a contract provision requiring the loser to pay the winner’s attorneys probably seems fair. And most likely, that’s why the English Rule came into being. It seems just and fair that the party in the wrong should pay for all the troubles it caused, and the party in the right should pay nothing.
In reality however, contested contract disputes (as opposed to contract cases where one party is knowingly in the wrong makes no legal defense) usually aren’t about clear issues of right and wrong. Rather, they involve gray areas or ambiguities. A fee provision substantially raises the stakes of litigating or clarifying these ambiguities. Relatively wealthy commercial entities such as large banks and developers almost always insist on prevailing party fee clauses, because it gives them leverage in the event of a contested contract dispute with a less wealthy party, such as the typical small business, consumer, or employee.
Consider, for example, a small company finds itself in a dispute with an extremely large one regarding a contract provision with two possible interpretations. The small company has sufficient resources to pay its own legal counsel, consisting of one lawyer charging $250 per hour. But the small company could go bankrupt if it had to pay for an extremely large company’s legal team, often consisting of multiple lawyers each charging significantly higher hourly rates. If the contract contains a prevailing party clause, the small company would have little choice but acquiesce to the large company’s biased reading of the ambiguous clause. The wealthy commercial entity can afford a high-stakes dispute over a contractual ambiguity; the small business cannot.
As you now see, prevailing party attorney fee clauses tend to create extreme unfairness in contract disputes unless the parties are on relatively equal financial footing. They also discourage more timid parties from seeking court-clarification of the parties’ rights and responsibilities.
If you’re wealthy, aggressive, and seeking an advantage, you probably want a fee provisions in your contract. If, on the other hand, you’re relatively small or timid when compared to the other party, you probably don’t want a fee provision.
III. Cut Both Ways. You might be thinking, I know a way to make attorney fee provisions work for my small business. I’ll just write in that that the other side has to pay MY fees if I win but not write anything about paying the other side’s fees. The contract will say “If Small Company prevails over Large Company in a dispute over this contract, Large Company will pay Small Company’s Lawyers.”
Nice try, but not so fast. In Washington, courts read fee provisions as “cutting both ways”. The court would interpret the one-way fee provision as allowing an award to whichever party prevails.
IV. Sometimes Even Little Guys Want Fee Provisions. There are instances when even small businesses and consumers might want a fee provision. Those times occur when the other party presents a high risk of defaulting on its contractual obligations in a straightforward way. For example, a small business might insist on a fee provision before entering a contract with a company or consumer that has a poor credit score, i.e., fails to pay people on time.
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