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The awarding of legal fees is a sword that cuts both ways.
Many clients, particularly those who believe that their adversary’s claim or defense is baseless, ask whether they will be entitled to recover attorney’s fees when they prevail in a lawsuit. After all, “why should I be out of pocket to collect what I am rightfully owed, or because someone wrongfully sued me?”
The short answer is that, in this country, as opposed to some others, attorney’s fees are only awarded to a prevailing party in two instances:
- When a particular state or federal statute provides for the awarding of fees, such as in certain employment matters, and in certain other types of claims.
- When the parties provide for the awarding of legal fees in a written agreement between them. This is sometimes referred to as “fee shifting.”
The practical impact of the prevailing rule (of attorney’s fees not being awarded) cuts many ways. Parties who are sued or who have a legitimate claim for which they are required to start a lawsuit can oftentimes be in a position of having to incur significant costs before they get an award or judgment. The awarding of attorney’s fees could help deter bad behavior and cause a party to think again before asserting a frivolous claim or defense. It could also help “even the playing field,” making it possible for a “little guy”—a party with limited resources—to assert a claim against a larger, well-heeled adversary.
On the other hand, in many instances, the awarding of attorney’s fees can have a chilling effect on the “little guy,” putting that party at risk to enormous legal fees if that party doesn’t prevail. The “little guy” may have a good claim, but in the event that he loses and is charged with the other side’s attorney’s fees, he could be responsible for an enormous amount of money. This may be of particular significance, not in the situation where one party or the other has a strong or weak case, but in those cases that turn on close or evolving questions of law, or close facts, making the outcome much harder to predict.
Fee-Shifting Provision
The decision of whether to include a fee-shifting provision is often a strategic decision, based in part on the relative strength of the parties and the types of claims that can be anticipated. If a fee-shifting provision is included, there are different ways that such a clause can be handled. One way is to make the awarding of attorney’s fees mandatory, either by an arbitrator (if there is an arbitration clause) or by a court. Another way is to give either the arbitrator or the court the discretion to award attorney’s fee to the prevailing party.
Whether or not to include such a clause in a commercial agreement is something that each party should give great consideration to.
Step Mediation Clause
A possible middle ground would be to have a “step” mediation clause in the same agreement that would provide a fee-shifting provision that would require the parties to go to mediation prior to initiating a lawsuit. That way, each party would have the opportunity to properly evaluate its case and the other side’s case with the help of a neutral third-party. This allows each party to better evaluate the possibilities and reasonableness of any settlement proposals before a fee-shifting clause would apply. Therefore, if a party is asserting either a frivolous claim or defense, that party would come out of mediation with a true understanding of the possible risks if they proceed to arbitration or litigation and lose.
How has the risk of paying legal fees affected your strategy?
