Businesses Should Consider Attorney Fee Provision in their Contract Documents

Business owners in the initial stages of litigation often ask whether they will be entitled to a reimbursement of their attorney fees if they prevail. This question is best asked at the time of contracting rather than left until disputes arise.

The “American Rule,” generally applied to litigation, is that each party must bear its own attorney fees. There are two exceptions to this rule: (1) when an applicable statute or court rule provides for an award of attorney fees, or (2) when there is an express agreement between the parties to pay attorney fees.

Statutes that allow for the award of attorney fees are often aimed at protecting individual rights. These are often found in areas of the law where an attorney might not otherwise be interested in handling the case. For instance, statutes allowing a prevailing party to collect attorney fees include certain discrimination claims, “lemon law” claims, and consumer protection claims.

In Michigan, the consumer of a product may also collect attorney fees if there has been a breach of an express or implied warranty. Business owners are sometimes surprised to learn that while there may be a statutory right of an individual plaintiff to recover attorney fees, there is no similar right on the part of the commercial defendant.

Some statutes may allow for businesses to collect their attorneys’ fees, such as claims for business torts (e.g., conversion), product disparagement claims, and defamation. The rules of civil procedure may also allow for the award of attorney fees in situations where an action is deemed frivolous, or where mediation or an offer of judgment has been rejected by an unsuccessful litigant.

Business owners can include an attorney fee provision in their contract documents. Attorney fee provisions are routinely upheld by the courts. There are only a few areas where such clauses are prohibited or unenforceable, such as in residential leases.

Because over 90% of all lawsuits settle before trial, few attorney fee provisions actually require enforcement. The mere knowledge by an opposing party that it may be liable for another party’s attorney fees often motivates settlement, and can lead to a better settlement than if there were no such provision included in the contract.

Businesses should consider including a provision on attorney fees in their contracts. It is often best to have the provision broadly drafted to include any dispute between the parties, not just those concerning enforcement of the agreement.

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Article Originally Published: Spring 1997

The information contained in this article is not intended to be legal advice. Readers should not act or rely on this information without consulting an attorney.