Boilerplate considerations: when to have an attorneys’ fees provision in your contracts.

I walked out of the conference room feeling great.  We had just hammered out a settlement dismissing a breach of contract lawsuit against our client.  The settlement terms were fair, and I was especially pleased because, at the time, I thought the chance that these particular parties would come to an agreement was slim.  Then my client turned to me and said, “I’m never going sign a contract with an attorneys’ fee provision EVER AGAIN.”

She explained that the only reason she didn’t see the matter all the way through trial was because she did not want to pay the opposing party’s attorneys’ fees.   Apparently, if she had fought and lost on the merits (a likely outcome) she would have been content with the result and attendant litigation costs.  But she was not okay with having to pay opposing counsel if she lost at trial.  More than likely, the contractual attorneys’ fee provision saved her months of expensive litigation costs on top of having to pay a judgment to the opposing party.

This has been my general experience with an attorneys’ fees provision in a contract.  After the merits of a claim or defense, the existence of an attorneys’ fees provision is the next most determinative factor regarding whether a dispute settles outside of the courtroom.

Under the general “American Rule,”[1] each party is responsible for its own costs and attorneys’ fees.  This general rule can be modified by an agreement of the parties to a contract (and for certain claims, by statute).  No “magic words” are required to alter the general rule.  In fact, I remember that the contract provision in the example above was simply worded, something along the lines of:  “If either party seeks to enforce this Agreement, whether in arbitration, mediation, or litigation, the prevailing party shall have the right to collect from the other party its reasonable costs and attorneys’ fees incurred in enforcing this Agreement.” I’ve seen such a boilerplate provision in nearly every contract I’ve dealt with, and you’ll find such a provision in most “form” contracts on the web.

So this begs the question, when should you include an attorneys’ fee provision in your businesses contracts?

Some attorneys have told me to always include an attorneys’ fees provision for reasons ranging from “that’s how we’ve always done it” to “otherwise parties wouldn’t hire attorneys to handle most disputes.”  Others have told me to never include the provision because it essentially imposes a penalty on a person who relies on the judicial system to determine the outcome of a bona fide contact dispute.  Because the best answer probably lies somewhere between “always” and “never,” I gave the question some thought.

Ultimately, I came up with three instances where including a boiler plate attorneys’ fee provision makes sense:

• The other party is much more likely to underperform or otherwise fail to hold up their end of the bargain.  When you’re simply buying goods or services for your business, an attorneys’ fee provision is a good idea.  All you have to do to hold up your end of the bargain is pay money.  It’s the other guy—whether properly developing the software you want; delivering your product in the right configuration and on time; or landscaping your yard exactly how you want it—who has the more complex task.  You’re the one who is more likely to be upset with the performance and would potentially need to bring a claim to rectify the result.
• It’s a complex contract.  When you’re contract involves multiple obligations, multiple parties (including the expectation of hiring of third parties), and is over a number of years, it’s probably a complex contract.  Having an attorneys’ fee provision in a complex contract should provide an additional incentive to the parties, including yourself, to perform the obligations correctly and on-time.  It’ll also encourage informal negotiations instead of formal litigation if something goes amiss, which leads me to . . .
• You want to avoid litigation. Litigation is expensive. Paying the other party’s attorneys fees only makes it that much more expensive.  Litigation is public.  Who wants to fight their customers or business partners in public?  Typically it’s not a sign of a healthy company.  As discussed above, attorneys’ fees provisions deter litigation and encourage private settlement.  You might even consider a tiered alternative dispute resolution clause in conjunction with an attorneys’ fees clause, to encourage mediation or arbitration (private forms of dispute resolution that are typically more cost effective).  For example, a provision could require that, before a claim can be brought at court, the parties must attempt to enter into mediation and arbitration. If the dispute still cannot be settled and an action before a court is instituted, the prevailing party before the court is entitled to attorneys’ fees and costs.

These are simply one attorney’s thoughts on the matter. If you think of any other instances when including a boilerplate attorneys’ fees provision in a contract makes sense, please let me know in the comments.

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