Contract Negotiation Tip 009 | Fee Shifting Provisions & Pyrrhic Victory
King Pyrrhus, of the Greek state of Epirus, defeated the Romans in 280 B.C. and sustained such heavy losses he was no longer able to continue his campaign. After the battle he cried “One more victory like this and we are lost!”
This type of hollow win, heavily outweighed by its cost, became known as a “Pyrrhic Victory.” Attorney fees in complex litigation can inflict such a heavy economic loss that a favorable judgement is a Pyrrhic Victory. Wins like this can put a company out of business.
In the U.S. the winner of a lawsuit does not automatically receive an award of attorney fees expended in the pursuit of justice. Here we follow the “American Rule” which provides that only in certain circumstances a court can order the losing party to pay the winner’s attorney’s fees. One reason behind the American Rule is that it allows parties to sue without being discouraged by the possibility of being required to pay the opposition’s legal fees if they lose.
The English Rule counterpart begins with the notion that for courts to truly make a party whole, the loser should be ordered to pay the winner’s legal bill. The different reasoning behind the two rules is the type of jurisprudence that excites some legal scholars. You just need to know what to do during the negotiation phase to position yourself to get your attorney’s fees paid and avoid a Pyrrhic Victory in the unlikely event of a lawsuit.
There are a few exceptions to the American Rule which allow a court to award attorney’s fees to the prevailing party. One such exception is created when the parties include a fee shifting provision in their contract. The other main exceptions involve bad faith or numerous fee shifting statutes that allow an award of attorney fees as a matter of public policy in certain types of cases.
If your company is handed a commercial contract that does not contain a fee shifting provision you should consider why such an important clause is absent. These clauses are a double-edged sword. Did the other party inadvertently omit the provision or is there a strategic purpose in not including it? While fee shifting provisions are typical in commercial contracts, there may be tactical reasons for not including the provision. The risk of being saddled with another party’s attorney fees can discourage a party from seeking judicial relief.
Whether your company should insist on a fee shifting provision is a situational call. The important tip here is to be aware that unlike the English Rule, a fee shifting provision must be included in your contract if you are to recover your attorney fees as the prevailing party at the end of litigation. Most American commercial contracts contain a fee shifting term because without an award of attorney fees a hard-won case may be a Pyrrhic Victory.
Lead Attorney & Owner
1Source Law LLC
