Why Your Contract Might Be the Key to Recovering Legal Fees

When involved in a lawsuit, it is only natural for the involved parties to be concerned about the potential financial burdens they might face, regardless of the outcome. One of the most common questions clients ask attorneys is whether they can recover their legal fees if they win the lawsuit. The answer isn’t as straightforward as you might expect.

Understanding the “Loser Pays” Rule

You may have come across the term “Loser Pays Rule” in your research or from others. This rule sometimes referred to as the “English rule,” asserts that the losing party of a lawsuit is responsible for paying the legal fees of the winning side. This approach is in place in many jurisdictions, including England, from where the rule gets its name.

However, the United States generally does not adhere to this rule. Why? The primary reason is that both the legislature and Congress decided they did not want to create incentives for people to opt for litigation as the primary means of resolving disputes. Given the litigious nature of the U.S., discouraging litigation is seen as essential.

The American Rule: Exceptions & Caveats

In the U.S., the prevailing rule is the “American rule,” which essentially posits that each party pays their legal fees, irrespective of who wins. However, like all legal standards, exceptions exist. These exceptions include:

  1. Statutory Allowances: There are instances where specific statutes or administrative rules allow the winning party to recover their attorney’s fees.
  2. Contractual Clauses: If two parties have a contract that states that the loser pays the winner’s legal fees, such a clause can enforce that rule.
  3. Court Sanctions: If a party violates certain rules or engages in wrongful conduct during litigation, the court might order them to pay the opposing party’s legal fees related to that particular issue or event.

The Importance of Including Legal Fees in Contracts

For business owners, the presence or absence of a clause on attorney’s fees in their contracts can significantly affect their position in potential legal disputes. A real-life example illustrates this point: A company, after providing impeccable service, had a client refuse full payment, knowing that suing for the owed amount would cost the company more in legal fees than the actual amount due. Without a clause to recover attorney’s fees in their contract, the company was left with limited options, resulting in them accepting a lesser payment.

This scenario underscores the importance for businesses to consider incorporating clauses related to legal fee reimbursement in their contracts, offering protection against potential malicious tactics by unscrupulous entities.

Settlements and Attorney’s Fees

When parties opt for settlements instead of a full-fledged lawsuit, the rules change somewhat. In settlements, the terms are primarily decided by the agreement between the involved parties. If both parties agree, one party can cover the other’s legal fees. However, in practice, such terms are often a point of contention. It’s rare for one side to agree to pay the other’s legal fees in a settlement because, by nature, settlements involve compromise from both sides.

Conclusion

While the desire to have one’s legal fees covered, especially after a hard-fought legal battle, is understandable, the reality is that the American legal system doesn’t guarantee this outcome. Unless there is a statute, rule, or contract that allows for the reimbursement of attorney’s fees, parties generally bear their own costs. For businesses and individuals alike, it’s crucial to be aware of these rules and to craft contracts with foresight, ensuring they’re prepared for any potential legal challenges.

Video Transcript

Does a Lawsuit Winner Always Get Legal Fees Reimbursed?

The answer is no, and you might be surprised by this because you often hear about in the news, parties are seeking reimbursement of legal fees. First off, most lawsuits ask for reimbursement of legal fees, even if they don’t have a chance of recovering them.

The ‘Loser Pays Rule’ Explained

But you might be asking, “Well, when can you recover attorney’s fees and when can’t you?” You might have heard about the Loser Pays Rule. The Loser Pays Rule says whoever loses the lawsuit pays the attorney’s fees for the other side. In the United States, we call that the English Rule. The idea is that in England, the rule may be that the loser pays the lawsuit, but in the United States of America, the courts have determined, and I should say the legislature and Congress have determined, that we don’t want to incentivize people to litigate and force them to have to resolve this through the court system to get their legal fees reimbursed. We want to discourage litigation. Let’s face it, the United States is litigious enough.

Exceptions to the Rule

So, in the United States, the general rule is you do not get your attorney’s fees when you win unless there is a statute or contract that allows for it. And when I say statute, I am including administrative rules. But basically, if there is not a law that allows you to recover the attorney’s fees you spent and there is not a contract that allows you to recover it. And the general rule is you can’t recover it. There are some exceptions in court rules. For example, if somebody does something bad or violates serious rules, the court can order one party to reimburse the other for legal fees in that particular hearing or that particular event, but it is not for the whole case. It would just be for those particular issues or events.

So it may be shocking to hear this, but you generally will not get your attorney’s fees reimbursed if you win. Even if you win huge in a lawsuit. The only exceptions are if a statute, some other law, or a contract entitles you to recover attorney’s fees. So when drafting contracts, I encourage every business owner to think about whether you want the right to recover attorney’s fees.

Defend Your Business Against Unscrupulous Clients

I observed one time when a company did great work for its client and the client said, “We would like a 30% discount or we are not going to pay.” And the company said, “Why? Was there something wrong?” No, there is nothing wrong. But essentially what they said was, “We know that you are going to have to sue us and it is going to cost you a lot more money than you will be suing us for. So if you don’t give us a discount, we are not going to pay you.” When that company brought this scenario to me, the first question I asked was, “Do you have a contract with them that allows you to recover attorney’s fees if they don’t pay?” Unfortunately, the answer was no, which means the American rule applies and they have no right to recover attorney’s fees. In this case, attorney’s fees would cost more suing them than the amount in dispute. And so, as a result, they had to take a lesser payment for their services because they had no other option.

That is how some unscrupulous and dirty companies play the legal system. And if you want to protect yourself against those sorts of predators, you as a business owner will think about, “Should I put in my contract an obligation that if the client doesn’t pay their bill, I have a right to recover attorney’s fees?”

Attorney’s Fees in Settlement Agreements

One other issue comes up here, and that is, “If we are in a settlement, can we recover attorney’s fees?” Well, whatever parties will agree to when settling the case is enforceable by law. So if a party agrees to cover the other party’s attorney’s fees, then that is their right. And basically, now you have a settlement agreement, which is a contract allowing for the reimbursement of attorney’s fees.

But usually, a demand for attorney’s fees and settlement, negotiations is the first thing to go because every attorney knows a settlement involves a significant compromise between the parties, and neither side is going to get their attorney’s fees covered in most situations. In fact, I don’t think I have ever seen a case that I have worked on where there was a settlement and one side paid the other side’s attorney’s fees.

They always ask for it. But in settlements, it is a compromise, and attorney’s fees are the first part of the settlement offer to be rejected by the other side. Part of it is because, “Hey, both sides have attorney’s fees. Why should I pay yours? You should pay mine.” And that kind of argument goes nowhere.

Conclusion

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I am Aaron Hall, an attorney for business owners and entrepreneurial companies. It was a pleasure talking with you today and answering your questions from an educational perspective. As I always say, before you rely on any of this, consult with an attorney. It is my hope that you use these questions to identify topics and questions to bring up with your attorney. Until the next live session, I hope you are doing well. Take care.