In America, the general rule is that everybody must pay their own attorney fees and court costs, UNLESS the contract, or a specific law, says otherwise. Turns out most people don’t care for that outcome, and so some contracts, and laws, change the rule about attorney fees to what’s called the English Rule, which says basically, “the loser must pay the winner’s attorney fees and court costs.”
The catch is that, particularly in a commercial contract setting, if a contract is not specific about who pays what in attorney fees and contracts, then the general American Rule applies. Obviously attorney fees and court costs can get expensive, so if your contract doesn’t include a simple clause changing attorney fees to the English rule, it can discourage the parties from enforcing (or defending) that contract.
Too often people overlook the lack of an attorney fee clause in a contract, wrongly believing they’re so standard that they must be in every contract, or believing that the English Rule applies. Not so.
We frequently review contracts without attorney fee clauses, usually between parties who didn’t get legal help. For example, service providers often form binding contracts by doing work based on a purchase order or a written bid, which didn’t include an attorney fee clause (for more information about forming contracts based on purchase orders, see our blog post. The result is that some parties, even with strong or “slam dunk” cases may be discouraged from initiating legal action because the lawsuit will cost more than they can recover.
Lesson #1: always look for, and include, an attorney fee clause in your contracts.
Lesson #2: make sure the attorney fee clause is clear, complete and makes sense when read together with your contract’s dispute resolution clause.
Specifically, courts narrowly interpret attorney fee clauses because they change the general American rule (or as a lawyer would say, because they are in derogation of the common law…). For instance, if an attorney fee clause says, “The losing party pays the winning party’s attorney fees,” the court might only award attorney fees if the parties went all the way through a contested trial, but NOT award them in case of a default judgment. Or, the court might not award attorney fees spent to enforce an arbitration award. Or, the court might not award court costs, just legal fees. You get the idea.
So what should a good attorney fee clause say? The answer depends on what kind of dispute resolution clause – if any – is in your contract. The attorney fee allocation should be consistent with the dispute resolution process. Attorney fee clauses should also always refer to “attorney fees and costs.”
A contract with a strong attorney fee clause makes it much easier to enforce, therefore, provides more protection. That’s because the wronged party in a contract dispute does not need to fear winning the battle (winning the lawsuit) but losing the war (paying more in attorney fees to win than the amount of damages awarded). If you’d like an attorney to review your contract, please contact our Business Law Group partner, David A. Closson at [email protected].