Business Contracts: What Should Yours Say Regarding Recovering Attorneys’ Fees in Case of Dispute? (Part 1)

As a business law attorney who handles business contract issues on the front end (business contract drafting, analyzing, etc.) and the back end (business law disputes), I’m always mindful how a legal agreement addresses the possibility of the “prevailing party” recovering attorneys’ fees and other legal type costs. Below I list four (4) different options; the second part of this article will address some of the factors and strategies which should be considered in deciding which option may be best for your situation.

1.    The “prevailing party” in the business to business contract dispute can recover legal costs and fees, including attorneys’ fees. This concept is pretty straightforward. However, when put into actual practice, identifying the “prevailing party” can be complicated. Further, the costs and fees at issue have to be tied to the claim(s) that said party prevailed on. Even if you clearly “win” on Count 1 of the lawsuit, what if you lose on Count 2? It’s nearly impossible to clearly distinguish, in detail, exactly what time, costs, fees, were devoted to working on Count 1 vs. Count 2 throughout the course of a case.

2.    Each party will bear its own legal costs and fees, including attorneys’ fees, regardless of who prevails in the business to business contract dispute. This is the least complicated option. It also discourages lawsuits in many situations; more on that concept is covered in Part 2 of this article.

3.    A hybrid clause in a business to business contract which allows a prevailing party to recover legal costs and fees, including attorneys’ fees, in specified situations. I am not sure I’ve ever seen this outside of contracts that I / my firm have drafted or edited – I’m confident others have done this, I just haven’t seen it. Here is an example, shortened and simplified just for example purposes here in this article:

“In case of a legal dispute over this Agreement or its subject matter, each Party shall bear its own costs and fees, including but not limited to attorneys’ fees, except to the extent the dispute is over Company’s payments to Contractor for Contractor’s Services, in which case the prevailing Party may recover those costs and fees from the non-prevailing Party.”

4.    Intentionally failing to address the issue of legal costs and fees in relation to a dispute between the parties in a business to business contract. If a business contract fails to address the recovery of legal costs and fees, then that issue is typically governed exclusively by the default laws and rules which apply to that contract. These laws and rules are more nuanced than many realize, and this issue can get particularly complicated if the parties are not located in the same U.S. state.

Please also note that the default laws and rules which apply to the recovery of legal costs and fees, including attorneys’ fees, can sometimes overrule contractual agreements on these issues. Even when that is possible, it’s obviously still better to customize your business law contract to suit your preferences.

These types of contractual clauses can apply to both formal lawsuits and to arbitrations. However, the contract lawyer writing or editing the agreement should be careful to use language precisely, such that the intent is clear and covers both formal lawsuits and alternative dispute resolutions such as via arbitration. With arbitrations in particular, close attention should be paid to the issue of the cost of the arbitrator and items such as securing space for the arbitration hearing versus the costs and fees that each party incurs for actual work performed and advancing or defending the claims.