When two parties litigate in America, each side typically bears its own attorney fees, whether they win or lose. The prominent exception to this rule is when attorney fees are specifically provided for either in a statute particular to the subject matter of the litigation or a in contract between the parties.
When I review or draft a contract for my clients, I always make sure that an “attorney fee clause” (otherwise known as an “enforcement clause“) is included. Attorney fee clauses provide that if either party to a contract successfully pursues or defends a cause of action for breach of contract, the losing party will pay the winning party’s attorney fees.
Attorney fee clauses are important for two reasons: (1) they deter frivolous or questionable lawsuits; (2) they allow meritorious lawsuits to be economically feasible; and (3) they encourage settlement.
Unfortunately, we have a very litigious society. Individuals and businesses are frequently sued without merit. Having a clause in your contract that makes the other side liable for your attorney fees if they lose is the best deterrent to non-meritorious lawsuits.
The flip-side of the coin is that if you do in fact have a meritorious lawsuit, but you have a small amount of damages, an attorney fee clause can make the lawsuit economically feasible. For example, if your business has a customer who owes you $1,000.00, and you do NOT have an enforcement clause, it will cost you more to pursue the lawsuit than you can possibly collect. You would be well advised to simply write off the money as lost. However, if you are able to collect attorney fees in addition to your $1,000.00 damages, the lawsuit may make economic sense to pursue.
The longer the suit goes on, the more expensive the attorney fee damages will be for the losing party . . . and there is no cap to these damages. If your opponent has a less than meritorious case, the potential for these damages may scare some sense into him or her. Not only will the person on the losing end of the lawsuit be more likely to settle fairly and quickly, but the lawsuit may not even be necessary. In the previous example of the customer with the $1,000.00 debt, that customer will be more likely to pay without litigation if he or she knows that not only will he or she owe $1,000.00, but also an unknown amount of attorney fees.