My previous three posts have explained and illustrated four critical provisions that should be included in most design professional contracts. In this post I will explain a fifth critical provision and I will conclude my discussion on what your contracts should say.
Let me start this discussion by being clear: you must have an attorney’s fee provision in EVERY contract you sign from now on. Why so adamant, you may ask? Why is it that critical? The prevailing party in any lawsuit will be paid its attorney’s fees by the losing party, right? So, wouldn’t including such a provision in my contract just be redundant? If you’ve ever wondered something similar to this, you’re probably not alone. But, these questions are based on a false assumption. Let me give you an example, which will help me make my point.
Recently, I represented a landlord in a dispute over a non-compete clause in a lease agreement. The landlord owned a grocery store that was the anchor tenant of a retail development. The landlord signed a lease with a tenant that wanted to operate a restaurant in one of the retail spaces connected to the grocery store. In the lease, the parties agreed that the landlord would not compete with the tenant by selling items in the grocery store deli that were similar to the restaurant’s menu items. Several months after signing the lease, and after some unfruitful negotiations, the tenant filed a lawsuit against the landlord for breach of the non-compete agreement. The tenant also sought a preliminary injunction, which if granted by the court, would force the landlord to stop selling the supposedly competing items in its deli.
Faced with the lawsuit, the landlord had to defend itself, particularly against the possibility of a preliminary injunction. We successfully defended against the injunction, and the tenant subsequently dropped its lawsuit against the landlord. The problem was, although the landlord won in court, it was still left with an approximately $10,000 bill for legal fees, which the landlord could not force the tenant to pay. This may seem like an illogical or harsh penalty for prevailing in a lawsuit, but that is the legal system we work in.
The outcome in that case, at least regarding attorney’s fees, was dictated by the “American Rule”.That rule, with a seemingly contradictory moniker, holds that both parties to a lawsuit pay their own way, no matter who wins. There are reasons for this rule. For one, we as a society do not want to discourage individuals from bringing meritorious claims for fear of having to pay the other side’s attorney’s fees. Related to that is the possible benefit society may lose if the party with a meritorious claim did not bring that claim because it did not want to risk paying the other side’s attorney’s fees. Whether we agree with these reasons is a debate for another day. But whatever the reason, the rule means that a plaintiff can file a lawsuit against a defendant, which the defendant may spend tens of thousands of dollars to successfully defend, and the defendant will be required to pay all of its own attorney’s fees. Undoubtedly, the defendant in that situation, similar to my landlord-client in the example above, will not be pleased with the effects of the rule.
Thankfully then, there are two exceptions to the general rule. The first is the statutory exception. This exception is that a prevailing party can recover its attorney’s fees (i.e., make the losing party pay for them) if a statute allows for it. For example, Utah’s mechanic’s lien statute states that the prevailing party on any action to foreclose a mechanic’s lien is entitled to an award of the reasonable attorney’s fees it incurred to prevail in that action. There are many statutes that similarly provide for attorney’s fees, but the problem is those statutes are out of your control. In other words, your situation may or may not fall within a governing statute, which is why the second exception should be your fall back.
The second exception is that a prevailing party can recover its attorney’s fees if a contract allows for it. This exception is entirely within your control, which is why every contract you sign should simply state that the prevailing party in any lawsuit or dispute that arises out of that contract will be entitled to be paid its attorney’s fees by the losing party. Every time you do not include an attorney’s fee provision in your contracts, you expose yourself or your firm to the risk of successfully bringing or defending a lawsuit and still being required to pay your own attorney’s fees. That risk can severely limit your options if you find yourself facing a lawsuit. You do not want to be facing the question of spending more in attorney’s fees than the amount of money you may be entitled to in that lawsuit. Spending $40,000 to recover $20,000 is throwing good money after bad—it is a bad business risk. Including an attorney’s fee provision in every contract will go a long way to eliminating that risk.
A fact of life in the world of a design professional is risk. Risk that you may be liable for not adhering to higher standard of care. Risk that you may be liable for losses that far exceed anything you or your firm are able to pay. Risk that you will have to indemnify another party, and even defend them, against claims that may not have been entirely caused by you or your firm. Risk that you may be personally liable for your own errors and omissions. And risk that you will prevail in a lawsuit, but be stuck with a legal bill that far exceeds anything you gained by prevailing in that suit. By recognizing these foreseeable risks and utilizing the contractual provisions I’ve discussed in these posts that reduce or eliminate those risks, you will help ensure you and your firm continue to survive and thrive in an uncertain industry.