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Tuesday, October 10, 2017

Business Contracts: What Should Yours Say Regarding Recovering Attorneys’ Fees in Case of Dispute? (Part 2)

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. This Part 2 addresses some of the factors and strategies which should be considered in deciding which option may be best for your situation. Part 1 addressed four (4) different ways to approach the costs and fees issue in a business to business contract.

calculating legal fees and cost
1.    The “prevailing party” in the business to business contract dispute can recover legal costs and fees, including attorneys’ fees. Why might – or might not – you want this in your company’s contracts?

One perspective is that the business more likely to sue would prefer that its business contracts specifically state the prevailing party can recover legal costs and fees. This potential outcome aligns with the likelihood of being the aggrieved party, or even just being the more legally aggressive party.

Another consideration is whether a party with lesser economic means is more able to obtain an attorney to work the case if recovering legal costs and fees is possible. The thoughts here are at least twofold: a) perhaps an attorney will take the case on contingency or at least partial contingency; and/or b) the party may be able to commit to paying for the case up front (non-contingency fee agreement with attorney) if the party believes that expenditure will be temporary and will be recovered, whereas the party wouldn’t or couldn’t justify the expense if recovering those legal costs and fees was impossible.

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. Why might – or might not – you want this in your company’s contracts?

The business less likely to sue may prefer that each contractual party bear its own legal costs and fees, so as to perhaps discourage litigation by another party.

The ‘smaller fish’ in a business to business contract may be concerned that the parties paying their own legal costs and fees, regardless of case outcome, may increase the chances of the ‘bigger fish’ using its presumably greater economic power to drown the smaller fish in litigation costs and fees. The thought here is that the smaller fish will give in more easily, as it knows it cannot recover legal costs and fees even if it prevails, and because it needs to stop the financial bleeding that a lawsuit has come to represent.

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. Why might – or might not – you want this in your company’s contracts?

Let’s say that you generally like the concept of each business having to bear their own legal costs and fees, but there is a particular scenario which may reasonably occur, and if that is the scenario, then you want the prevailing party to be able to recover legal costs and fees from another party. A practical example might be a business which is a service provider and who doesn’t usually have legal disputes, but when it does, the disputes are most commonly that it has not been paid for its services. That company’s business to business contract might state that each party bears its own legal costs and fees, unless the dispute is regarding payments for services rendered, in which case the prevailing party may recover its legal costs and fees (and costs of collection), including attorneys’ fees, from the non-prevailing party.

Keep in mind that this is a much less “tried and true” (less common) option and might be more subject to challenge.

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. Why might – or might not – you want this in your company’s contracts?

Failing to address this issue in a business to business contract doesn’t necessarily end up harming (or helping) one business vs. another – or at least that issue cannot be completely predicted and will vary from circumstance to circumstance. There are occasions in which a party (or the party’s attorney) may receive a contract from another party for consideration, note that it does not address this issue of legal costs / attorneys’ fees, and a conscious decision might be made not to interject that issue into the agreement or the contract negotiations.

The choice not to raise this topic might be to avoid dealing with a contentious issue, to not risk slowing down the negotiation process, and/or to not risk interfering with the actual joint work moving forward. Also, the smaller fish may be concerned that if this issue is raised, the other business may use its (probable) superior leverage to force an agreement on legal costs and fees to favor it, meaning perhaps better not to raise it at all.

If the contract between the businesses does not address this issue, then the default law on the award and recovery of legal costs and attorneys’ fees should apply.

Cautionary consideration. 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.