A recent Colorado Supreme Court case about attorney fee awards will have a significant impact on business litigation and contract terms.  In Planning Partners. Int’l v. QED, Inc., 2013 CO 43 (Colo. 2013), the Colorado Supreme Court declined to follow the lead of other states and the Court of Appeals and award attorney fees to the parties according to a formula proportionate to the award of damages.  Instead, the Supreme Court said that the trial judge has discretion to award attorney fees to the parties and in an amount that he or she thinks is reasonable.

The general rule in the United States – the “American Rule” is that everybody pays their own attorney fees, unless a law, regulation or a contract says otherwise.  Most well-drafted business contracts will have a clause that shifts that outcome to the “English Rule”, which says that the loser must pay attorney fees.

Of course, many business lawsuits are complex, featuring more than two parties and not only claims but counterclaims.  In cases like these, where more than one party gets some of what they were asking for in the lawsuit, who is considered the winner – that is, the “substantially prevailing party”?  And how much of their attorney fees must the loser pay?

These important questions are finally answered for Colorado in the Planning Partners case: the trial court gets to decide who must pay and how much.  Specifically, the Court said, “where a promissory note or contract provides for reasonable attorney fees, and the judgment based on the note or contract is reduced by a counterclaim arising out of the transaction, the determination whether and how to apportion fees rests within the discretion of the trial court.” 

Another important question answered by this case is “How do I know if my attorney fees will be reimbursed if I proceed with a lawsuit?”  The answer is, you don’t.  As a result of the new decision, there is less certainty in attorney fee awards.  The judge in your case may decide to apportion fees if the contract so provides.  The judge must also look at whether the fees are reasonable under the circumstances, and the facts of the case to decide what is fair.

Overall the holding in the Planning Partners case is consistent with a general rule of contract drafting, that any change from a general rule – in this case, the American Rule of everyone paying their own attorney fees – will be strictly construed and evaluated for fairness.  That means the actual language of attorney fee clauses in contracts have become even more important in light of this case.

As we noted in our post on the [pitfalls of boilerplate clauses in contracts http://www.hsbusinesslaw.com/contracts-competence-boilerplate-pitfalls], it is particularly important to read and understand how the attorney fee clause in your contract or promissory note will operate in case things go wrong.  Copying a boilerplate attorney fee clause that was drafted for another state or a different situation may not result in the outcome you expect.

If you have questions about how this new case may impact an attorney fee clause in a contract or promissory note, please contact David Closson, attorney and head of our Business Law Group, at [email protected].

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