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Should You (or should you not) Include An Attorney's Fees Provision in Your Contracts?

  

            When parties to a contract are forced into litigation to resolve a dispute, and are required to engage the services of an attorney, any profit from the transaction can quickly evaporate with the payment of the attorney's fees incurred to prosecute or defend the litigation.  The hourly rate for attorneys has dramatically increased in recent years, and, in a relatively short time, an attorney can eliminate all the profit from a transaction.  Even if the matter is handled by the attorney on a contingency basis, i.e., the attorney is paid a portion of the recovery, the funds paid to the attorney are still lost income to the party.

            To avoid the loss incurred by paying attorney's fees, contracts typically contain a provision that the prevailing or successful party is entitled to recover attorney's fees from the other.  Indeed, most attorneys when drafting contracts include a provision allowing the recovery of attorney's fees based on the laudable, but mistaken, belief that their client will not be the breaching party.  Many standard form contracts also contain a provision allowing for the recovery of fees.  This type of contractual provision is not always a benefit, and, in any event, it does not guaranty the actual recovery of fees.

            Some thought should be given to the realities of the situation before a party signs a contract that includes an attorney's fees provision.  As discussed hereafter, as a practical matter, sometimes an attorney's fee provision can only work in favor of one of the parties to a contract and not the other.  There are various factors to consider before inserting or deleting an attorney's fees provision in a construction contract.  A few considerations include:

              1.       Ability to Pay:  A primary consideration as to whether to include an attorney's fee provision in a contract is the financial strength of the other party.  For example, an attorney's fees provision may provide no benefit to a well financed company that enters into a contract with a thinly capitalized party.  The thinly capitalized company may not be able to actually pay attorneys even if ordered by a court to do so.   On the other hand, the well financed company would be able to pay if a court ordered it to do so.  As a result, as a practical matter, an attorney's fees provision under these circumstances will only benefit the poorly financed company. 

            2.         Anticipated Issues:  Before an attorney's fees provision is inserted into a contract, consideration should be given as to what are the likely claims to be asserted.  If, for example, the contract contains a remedy for one party that will not require court intervention, such as a termination provision, that party may have no reason to include an attorney's fees provisions.  However, if a party anticipates that any claims that may be asserted by it will require litigation, then an attorney's fees provision can be beneficial.  

            3.         Funding Litigation:  Another factor to consider is the ability of the parties to actually fund the prosecution or defense of litigation.  As harsh as it may sound, litigation is expensive, and some companies simply cannot afford to be involved in litigation without hope of recovering the attorney's fees it will incur.  Also, some attorneys are more willing to represent a party who cannot pay fees if the contract contains an attorney's fees provision.  This is one of the reasons attorneys have suggested that an attorney's fees provision encourages litigation.

            4.         Impact on Settlement:       Because attorney's fees can be a significant part of a claim, the potential award of fees can make settlement more difficult.  If the fees are significant, the party who is contractually obligated to pay the fees will find it difficult to settle if the settlement amount includes attorney's fees paid by the other party, even if that is the prudent thing to do.  People simply do not like paying the attorney's fees incurred by the opposing party, and this fact may delay or eliminate a possible settlement.   

            However, an attorney's fees provision can operate as an incentive to a party to evaluate the merits of a claim against it if the party is faced with an obligation to pay the attorney's fees incurred by the other.  For example, if a party has a claim asserted against it under a contract allowing for the recovery of fees, the owner would be will advised to evaluate the claim earlier rather than later to avoid or eliminate a claim for the fees incurred by the claimant. 

            Although the contractual provisions generally provide for the recovery of attorney's fees by the prevailing or successful party, a net positive recovery in a court action does not necessarily equate to "prevailing" or "successful" for the purpose of awarding fees.  The Utah courts have adopted the "flexible and reasoned approach" to determining the prevailing party for purposes of awarding fees.  This rule requires that the courts not simply award fees to the party who recovers a net positive judgment, but must consider the merits of the claims and defenses, and who actually prevailed.  For example, a party may be awarded only a small portion of the total claim.  Although the party technically prevailed, the other party actually had the better result.  The flexible and reasoned approach to the determination of the prevailing party requires the court to not only consider the net judgment in a case, but to further consider the amount claimed against what was recovered, among other things.  The court deciding the issue of recovery of fees has wide discretion in determining the prevailing party.  However, to an extent, contractual provisions can be written to modify this flexible approach taken by the courts.  If an attorney's fee provision is included in the contract, the provision should be written with consideration given to the actual meaning of the terms "successful" or "prevailing" as interpreted by the Utah courts.

            As a final note, in Utah, as most states, attorney's fees can only be recovered if provided by contract or statute.  There are few statutes that provide for the recovery of fees in ordinary commercial or business disputes.  Accordingly, if you intend to recover fees in the event of a contractual dispute, make sure the contract contains such a provision.