Are Your "Attorneys' Fees & Costs" Provisions Effective?

You've seen those provisions in just about every contract you've read, right? The ones that say that whoever loses in litigation has to pay the winning party's attorneys' fees and legal costs? Sure, we all have. As any contract lawyer who litigates will (should) tell you, these provisions often don't have any teeth to them because 1) over 95% of commercial lawsuits settle before a verdict is ever returned, often leaving the parties to agree to pay their own legal fees and costs; and 2) sometimes it is hard to tell which party won! I was reminded of this very fact while reading an article in today's 'Corporate Counsel Update,' titled "A Different Kind of Fee Shifting Contract Clause" by Eric Fishman  The article goes in to a bit more depth as to the historical basis for awards of attorneys' fees & costs, as well as the obstacles to obtaining such awards.

Solutions. The meat of the article though, offers an example of how to enforce attorneys' fees & cost award provisions in commercial contracts, suggesting 1) adding a non-merit-based award for attorneys' fees and costs that would come due almost immediately upon each ruling by the court; and 2) defining the "prevailing party" on the merits to be the one who wins the majority of the suit, to determined by the court.

Awards Not Based on the Merits. Examples of when non-merit-based awards may be granted, might be when a defendant files a motion to dismiss a complaint, and the motion is denied therefore allowing the case to proceed, then the defendant would have to pay the plaintiff's attorneys' fees and costs related to defending that motion to dismiss. Conversely, if the defendant's motion to dismiss the entire complaint was successful, then the defendant would be entitled to attorneys' fees and costs from the plaintiff, just as typical fee-shifting provisions intend.

Defining "Prevailing."  However, let's consider what is "prevailing" and, say, there is a five-count complaint, and a defendant files a motion to dismiss each count, but is successful in only getting two of the counts dismissed (or 40%), then the defendant would have to then pay 60% of the plaintiff's fees & costs at that time.

I see some real advantages in the potential effect of this type of motion-based award deterring some of the frivolous, time-delaying tactics often used by litigation attorneys to delay, drive up fees for the opposing party and frustrate the purpose of the litigation.

Liquidated Fees & Costs Awards. Another way to reduce fees & costs overall, is to tie a liquidated damages clause to the attorneys' fees & costs provision (a flat or formulaic, pre-determined amount triggered by an event, such as a successful or failed motion). Such a liquidated damages clause could assess pre-determined damages for certain prevailing or failing actions taken in litigation, and cause you to avoid further litigating what fees and costs are appropriate or assessable to the successful or unsuccessful part of that litigation. The risk in using such a clause is that as a prevailing party, your fees and costs may far exceed what the contract calls for to be assessed to the non-prevailing party, but on the other hand, it is possible to be overcompensated by such a pre-determined fee. Note though, some jurisdictions may not allow for liquidated attorneys' fees or costs awards.

Discuss with your contract attorney as to whether and how effective the attorneys' fees and costs provisions are in your new or repeatedly used contracts.

Joshua Logan of Achieve Legal is a Florida-licensed Franchise and M&A Attorney, serving clients throughout Florida from Orlando, and nationwide through association with local counsel. You can call him at (850) 339-9236, or he can be reached by e-mail JLogan@AchieveLegal.com. 

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