Should I Put an Attorney Fee Clause in My Contracts?
When preparing contract documents for clients I am occasionally asked if we should include a clause to award attorney fees in case the other party breaches the agreement. When a client brings me a contract and wants to bring an action against the other side, that is one of the first things I look for. That provision change the analysis of the case.
In considering this issue, I think there are two things to remember:
First: A provision allowing only one party to recover attorney fees is not usually a good idea since some courts will read these as giving the prevailing party, whichever side this is, the award; and Secondly: Prevailing party attorney fee provisions are an incentive to sue, since the plaintiff always believes that they are right.
One way attorney fee agreements essentially provide that if “Joe,” brings an action to enforce this agreement, the other side must pay his attorney fees. If Joe wants to enforce the agreement because of some perceived breach of contract, he will assume that he will recover all of his attorney fees. So Joe wants to sue without regard to the cost, or in some cases without regard to the actual merits of the case.
California has a statutory scheme in contract actions that in many cases awards fees and costs to the prevailing party. You only need to read some of the cases to see the significant number of cases and appeals over who was the prevailing party and what the reasonable fees were.
I confess that at one time I thought the opposite was probably true, because of the additional risk an attorney fee provision brought to any action. However, on the positive side I believe that once an action is brought, the risk of attorney fees sometimes bring the parties together for a settlement.
Joe may or may not be able to recover his fees. Most courts will make a determination based on success in the action. Many courts will read the attorney fee provision as a prevailing party attorney fee provision. However, most cases settle, and I have yet to see a settlement that included an agreement to pay the other parties attorney fees. (I am sure it happens, but usually both parties cover their own fees.)
Some cases start out and the possibility of an award of attorney fees keeps a case from settling. If a substantial amount of money has been spent on attorney fees, will parties settle at a price that covers all of the contract damages only?
A provision that provides that each party is responsible for their own attorney fees and costs in the event of a dispute might very well be a better way to go. It is worth considering.
