Should You Include Attorneys Fees in your Contracts?
Your business relies upon your ability to enforce the contracts and agreements that it enters into. And while your business may draft an airtight agreement, with provisions that are favorable to you, you still may have an economic feasibility problem when it comes to going to court to enforce your agreement. That problem may be attorney’s fees.
The Problem With Fees
Certainly, for larger disputes, paying an attorney to enforce your rights is a smart business decision. When there are hundreds of thousands of dollars at stake, it only makes sense to pay an attorney to pursue your rights.
But what if your business provides products or services that are in the hundreds of dollars? Hiring an attorney can cost you more than what you’re actually owed by your customer. There’s no point paying an attorney $1,000 to collect on a $500 contract.
Unfortunately, contrary to popular opinion, someone who wins in court is not automatically entitled to collect their attorney’s fees. Attorney’s fees are only awarded if a law or statute provides for them, or if a contract has a provision allowing them to be awarded. This is sometimes called the “American Rule.”
Fee Provisions in Agreements
That means that to recover attorney’s fees, you’ll likely need to have a provision in your contract providing for them. The language inserted into your agreements should say that if you need to enforce your contract in court, you are entitled to also collect attorney’s fees if you prevail.
This way, in our example above, if you were successful, the court could award you $500 in contractual damages, and $1,000 in attorney’s fees.
There are some things to be aware of when it comes to fee provisions, however. The law also says that if a contract allows one party to recover fees if they prevail, it will be interpreted to allow the other to get fees if they prevail as well (reciprocal fees). In other words, if you have a fee provision in your contract, and you lose your case, you could end up owing the other side’s attorney’s fees—even if the language of your contract only says you get them if you prevail. Inserting attorney’s fee provisions can thus create some risk to you.
There may also be a problem with determining whether you are the prevailing party. Courts often have problems declaring who gets fees, where the judgment isn’t exactly what the suing party asked for. If you sue for $10,000 in a breach of contract but the court awards you $5,000, you may not be the prevailing party. If you sue for money and an injunction, and you just get the injunction, you may not be the prevailing party.
Attorney’s fee provisions can make contracts or disputes feasible to sue upon when they wouldn’t ordinarily be because of attorney’s fees. As long as you understand the pros and cons, you can make an educated decision as to how and when to use them.
Make your business contracts work for you, and give yourself the ability to enforce them if you need to. Contact Tampa business, asset and probate attorney David Toback to discuss protecting your business in all situations.