Contracting Pitfalls Part Ten: Attorney’s Fees
The American Rule on the collection of attorney’s fees in litigation generally provides that if attorney’s fees are not required by a special statute or by contract, each party must bear his/her own attorney’s fees and cannot collect them from the other side. So, it is not uncommon for contracts to have an attorney’s fee provision included in them to allow attorney’s fees to be recovered in the event of a breach of the agreement.
These types of clauses usually come in two flavors. The first is a prevailing party clause which says that in the event of any litigation under the agreement, the party who wins would be entitled to an award of reasonable attorney’s fees as part of the damages. This makes attorney’s fees recoverable as an element of damages and provides a level playing field for both parties to the contract. These are generally not objectionable.
There is another flavor, however, that is more concerning. This is an attorney’s fee provision that allows only one party to collect attorney’s fees in the event of a breach. Sometimes this is expressed in a fairly subtle fashion. Language may specifically provide that in the event of a breach of the agreement, one party, usually using a defined term for that party’s name, will be entitled to recover attorney’s fees. By being silent about the other party’s ability to recover fees, the American Rule kicks in. This means that while one party can get attorney’s fees, the other cannot. This is a serious leverage imbalance between the parties and this type of clause should be rejected or be revised to be made mutual whenever possible.