Attorneys’ Fees Clauses-The Basics

You have probably heard of “attorneys’ fee clauses” (a/k/a “prevailing party” clauses) in contracts. But do you know how they work?  In the United States, when parties are involved in litigation, typically each is responsible for paying its own costs and legal fees.  This is fine for those who can afford to hire attorneys to pursue (or defend) a lawsuit.  But what are people (or companies) that don’t have sufficient funds supposed to do?  It can be a problem when a deep-pocketed party can pursue a claim that lacks merit.  It can also mean there is little consequence for pursuing a lawsuit that really has no merit.[1]  The idea that each party is responsible for their own attorneys’ fees is known as “the American Rule” – versus the “the British Rule”, in which the losing party pays the winning parties’ legal fees.  Many believe the American system is why there is so much more litigation in the U.S. than in Britain.

But there are some exceptions to the American system.  For example, in Washington state, there are three situations in which the loser pays the winner’s costs and attorneys’ fees: (1) when it’s allowed by specific statute, (2) when it’s included in a contract, and (3) on “equitable” grounds (which is rarely ever found, so best not to count on it).

For example, when a party sues claiming violation of Washington’s Consumer Protection Act (RCW 19.86), the prevailing (winning) party can recover reasonable attorneys’ fees and other costs from the non-prevailing (losing) party (RCW 19.86.090).  This helps level the playing field when a customer is misled or otherwise injured by a seller of some product or services that violates the CPA, and encourage attorneys to take on cases against deep-pocketed parties.

But what about those lawsuits where the amount being fought over is less than $10,000?  By statute, the prevailing party is entitled to have its costs and reasonable attorneys’ fees paid by the other side.  RCW 4.84.250.  Not surprisingly, the idea is that the merits of the lawsuit should not be outweighed by the financial costs of suing or defending.  Likewise, when a winning party has to litigate how much fees they are to recover, they can get those fees paid by the losing party too.  See, e.g., Fisher Properties, Inc. v. Arden-Mayfair, Inc., 115 Wn.2d 364, 378, 798 P.2d 799 (1990) (“The general rule is that time spent on establishing entitlement to, and amount of, a court awarded attorney fee is compensable where the fee shifts to the opponent under fee shifting statutes.”). In other words, if you are on the losing side, it can be even more costly to argue too much about attorneys’ fees.

As for contracts, they can include a provision that, in the event of a lawsuit between them, the prevailing party will be entitled to recover their attorneys’ fees and costs. So long as it’s in a valid contract, the courts will generally enforce it.  The prospect of having to pay the other side’s legal fees gives everyone a reason to look very closely at the strengths and weaknesses of their case.  It gives the party that does not have the balance of the facts and law on its side an incentive not to drag things out, and to strongly consider negotiating a settlement to minimize risk of losing even more if the case went to trial.

In Washington, if there is an attorneys’ fee clause in a contract, it is deemed to apply to whichever side basically is the winner – even if the clause is drafted so that it looks like it favors just one of the parties.  For example, if a construction contract says the contractor can recover its attorneys’ fees if the customer unsuccessfully sues, the courts will read that clause as applying to both parties – so that the customer can recover its fees if it wins the lawsuit against the contractor.  RCW 4.84.320.

[1] Whether a lawsuit is actually “frivolous” is a harder question than one might think.