Attorney Fees in Contracts

We are continually asked our opinion (not legal advice) on whether an attorney fee provision should be part of the written contract. The answer we offer is always the same, “well how do you feel about the attorney fee provision in a contract?”

In our experience, an attorney fee provision in a contract can be good or bad, depending upon the situation. For a smaller start-up company that has very little cash reserve to fight a long drawn out battle, attorney fees can really make or break the company before it even really begins to get off the ground. Most contract litigation is not contingency based, meaning that the company will need to fund the fight each step of the way, with attorney fees usually being billed at an hourly rate and due on a monthly cycle. A smaller start-up is less likely to have the ability to fund that type of litigation, unlike that of a larger company or corporation that can withstand paying those larger fees.

To a start-up company that can’t sustain the fight against a much larger company then attorney fees do not matter. And honestly you see this type of David and Goliath scenario play out in the construction industry almost daily. Subcontractors getting in a dispute with a general contractor that is 10x the size of the subcontractor. While the general contractor can finance a long drawn out battle, the subcontractor with 3 employees typically cannot.

However, when you have two companies that are sizable and both can sustain the battle scars of a long drawn out litigation process, then the attorney fee provision really comes down to the personal choice of the higher powers that be. Absent an attorney fee provision, each company will finance their own battle and should they prevail, they prevail for whatever the action (lawsuit) was seeking and attorney fees are not recoverable.

If the attorney fee provision does exist, then the prevailing party (prevailing party is defined in several different ways) will be entitled to their “reasonable” attorney fees and costs as well as whatever the action (lawsuit) was seeking.

It should be noted that sometimes when attorney fees are not in play (no attorney fee provision), it can sometimes be a sobering fact as litigation fees and costs rise. At times this can (and you do see it happen) lead to compromise, where a settlement is reached before each party starts to rack up large attorney fees and costs.

While we do have clients that will always opt to have the attorney fee provision in their contract, we also have clients that only choose to use this provision on a contract-by-contract basis and then we also have clients that do not use the attorney fee provision and never will, for the very same reasons stated above.

Since every situation is very different, there will always be risks and exposure involved, therefore, as with any litigation decision, attorney fee provisions are always solely up to the client. Personally, this is where we suggest mediation and arbitration provisions, where attorney fees whether spent or recovered as a prevailing party, are far less risky than a full blown court trial.

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