Wednesday, February 3, 2010

The Pros and Cons of Attorneys Fees Provisions

Despite your best intentions, you could find yourself in a situation where you are forced to sue another company - or worse yet, a situation in which another company or client is suing you. To add insult to injury, the practicality of the lawsuit could boil down to one, little clause in the contract: The attorney fee clause.

An attorney fee clause is a small clause in a contract that something to the effect of, "In the event of litigation relating to the subject matter of this Agreement, the non-prevailing party shall reimburse the prevailing party for all reasonable attorney fees and costs resulting therefrom."

In plain English, this means that should a lawsuit occur, the loser is responsible for paying all of the legal fees - for both parties.

Not all contracts have attorney fee clauses and in most cases, the omission of an attorneys' fee clause is intentional. In the end, the decision about whether or not to include this clause depends a lot on which party is most eager to achieve an advantage.

The Argument for Attorney Fee Clauses

Attorney fee clauses are ultimately an economic issue one party uses as leverage to dissuade the other party from following through with a lawsuit.

In certain situations, this clause can be used to your advantage. For example, suppose someone is harassing you with a frivolous lawsuit and you know they can't afford proper legal counsel. The risk you assume in defending the lawsuit is minimal compared to the risk that is being assumed by the other guy, especially if you stand a good chance of coming out on top.

In some cases, attorney fee clauses may actually prevent lawsuits from ever being filed in the first place.

This is particularly true in cases where the potential gain from a lawsuit is dwarfed in comparison to the potential liability created by the legal process. If your company sells widgets for $250, it's unlikely that a customer will sue you for the price of your product once he discovers that he may be responsible for thousands of dollars in attorney fees and other legal costs.

The Argument against Attorney Fee Clauses

Attorney fee clauses do not always work to your advantage. No matter how big your company is, there is always someone bigger out there.

Should your relationship with a larger company run afoul, the larger company will not be intimidated by the inclusion of an attorney fee clause in your contract. In fact, since an attorney fee clause works to their advantage, they will most likely welcome it and use it to run your business into the ground through legal fees.

Another situation in which an attorney fee clause can hurt you is if you lose the lawsuit - regardless of the financial state of the other party. Your cleverness in including this clause in your contracts could potentially backfire on you and leave you holding the bag for everyone's legal bill.

If you decide to include attorney fee clauses in your contracts, you should know that under some circumstances they may not be legally enforceable. If you are in California consult your Out-House General Counsel to determine the specific language you will need to maximize its enforceability.  If you are operating in another jurisdiction, contact a local qualified business attorney.

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