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Why You (Don't?) Want an Attorney Fees Provision in Your Contract

Sep 1

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9/1/2014 2:31 PM  RssIcon

WHY YOU (DON’T?) WANT AN ATTORNEY FEES PROVISION IN YOUR CONTRACT

 

This is the third in a series of advisories highlighting how those miscellaneous provisions at the end of most contracts - which many people don’t even read - can really matter.

Let’s say you provide $5,000 worth of services to your customer.  You did a good job and your price was fair, all of which your customer will readily admit.  Your customer just chooses not to pay because he doesn’t want to.  A common reaction of someone in your position is “I want to sue for what I am owed.” 

There are two key things to know about this situation, the first of which many people don’t realize and the second of which many times even most experienced businesspeople don’t seem to realize.  The first thing is that litigation is expensive, and generally just to take the first step to sue someone will cost you $5,000 or more.  The second thing is that in American courts, generally each party has to pay its own legal fees and expenses, even if it wins.

In disputes of modest magnitude, this can be a controlling dynamic.  There is often no point in hiring an attorney to sue someone for a $5,000 debt, even if the case is a slam dunk.  If the rare best-case scenario occurs and the other party upon being served with the suit immediately strokes you a check for the full amount you are owed, your net will be $0.00 and you will be out the angst and lost time of preparing the lawsuit.  Let’s say you are owed $15,000, and again there is simply no doubt whatsoever that you will win.  If you have to follow through with the lawsuit to completion, it will likely cost you more than that in attorney fees and expenses.  It is true that the other party will have its own attorney fees to pay, but they will likely think that at least starting to defend the suit will be a decent investment.  They know there is a good chance that if they can make it appear that they will defend the suit to completion then you will either drop the lawsuit or settle for way less than the amount owed.

However, a specific provision added to a contract that the prevailing party in a dispute will be entitled to recover its attorney fees and expenses from the other party will generally be enforced, and can totally change this dynamic.  If there is no doubt about the outcome, now the dynamic is that your customer will fear that if he resists paying you then he might have to ultimately pay you not only what he owes you, but also your attorney fees and expenses - plus he will be out of pocket his own attorney fees and expenses.

So you always want an attorney fees provision in your contracts, right?  Well, here come the two words spoken more frequently by us lawyers than any other words: “It depends.”  Such a provision will greatly increase your ability to pursue a modestly sized claim when you are clearly in the right.  It might also discourage a party from asserting a frivolous claim against you.  But there are cases in which you might want to think hard about whether you really want an attorney fees provision in the contract.  For one thing, if you end up breaching the contract it will increase your exposure.  For another, such a provision can be dangerous if your case is not a slam dunk, the other party has substantially greater resources than you, or both. 

Let’s say that your customer Mammoth Corporation decides that it simply doesn’t want to pay you the $100,000 they owe for the goods that you manufactured for it.  They muddy the waters with claims that the goods weren’t quite right, etc.  You are sure that, notwithstanding their claims, your chance of prevailing is 80%.  They vow to fight you with their high-priced law firm that will probably ring up $100,000 in legal fees, and there is a decent chance that they will either wear you down in the litigation or eventually win through some technicality.  Let’s say your legal expenses would probably be $30,000.  You have an 80% chance that you will recover $130,000 (the $100,000 that you are owed plus your $30,000 in attorney fees and expenses) after fighting for months or years, and a 20% chance that you will end up another $130,000 in the hole (both sides’ attorney fees) even though you were absolutely in the right.  You would have to think really hard about pursuing this.

So this is why you (don’t?) want an attorney fees provision in your contract.

What would any written material coming from a lawyer be without a disclaimer?  Here it comes: This advisory contains general information only.  It is not intended to be and should not be relied upon as legal advice for any specific situation.  Your mileage may vary.  Offer void where prohibited.

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