“Boilerplate” Language: Attorney Fee Clauses

Most business contracts feature some “boilerplate” clauses covering a number of items that may seem incidental to the main thrust of the agreement.  Many people are tempted to skim past this language or ignore it entirely, assuming it is “just standard,” but these clauses can sometimes make an enormous difference.

This month, I would like to discuss the attorney fee clause.  To understand its significance, you first need to know that American courts generally do not include attorney fees as part of the judgment for the winning party in a lawsuit.  What this means, of course, is that you can theoretically win a lawsuit but still be worse off because of all the money you had to pay to defend yourself.  (This is the so-called “American Rule,” which differs from the “English Rule,” where the winning party normally gets attorney fees.)

One of the main exceptions to the American Rule is where the contract which is the subject of the lawsuit includes an attorney fee agreement.  This will typically be in a form that looks something like this:

Should any litigation be commenced between the parties hereto, the party prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for his attorney’s fees in such litigation.

An attorney fee clause can be written in many different ways, and can cover all or only some disputes.  Historically, there have been unilaterialattorney fee clauses, meaning that the contract provides that one party (usually the one who drafted the contract) can recover attorney fees in a lawsuit, but not the other.  In California, that sort of clause does not work: by law, all attorney fee clauses are automatically bilateral, even if they say they aren’t.

Whether you want an attorney fee clause in your contract can be a difficult decision.  On the one hand, you may have a legitimate concern that a lawsuit could put you in an “even if you win, you lose” situation, and so you want the attorney fee clause to discourage weak lawsuits.  On the other hand, I have seen many situations where there is an attorney fee clause, and as the attorney fees exceed the amount originally sued over, the parties refuse to settle because they want their attorney fee recovery!

When deciding whether and what kind of attorney fee clause will be in your contract, you need to think about the types of disputes that are most likely to arise, and what ways you can minimize the impact of those disputes.  Some contracts are best with them, and some without, but often it is a personal choice.  Either way, it’s not something that you should just ignore because it’s “boilerplate.”