August 25, 2017

“Loser Pays” Attorney Fees Clauses in Contracts

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Unlike in some other countries, in the United States in general (and in Indiana in particular) as a general rule when you go to Court you pay your own attorney fees – win, lose or draw. There are exceptions such as when one side takes a frivolous position, or when the victim of a crime is suing to make it right, or in a successful action by the victim of reckless or intentional misconduct, but by and large the rule is that when you go to court, you pay your own way. 

This general rule makes some sense. If a person sincerely and in good faith believes that he/she has been wronged, that person should not be discouraged from using the courts. There are plenty of rules protecting the other side from your filing a frivolous or bad faith case, so there is arguably no reason that he should have to pay the other side’s fees just to have his case heard if it turns out that he loses.

The same pay-your-own-way law applies in contract disputes, just as in property or personal injury disputes. But the law allows parties to a contract to agree as part of that contract that if one party sues the other, then the loser pays the winner’s attorney fees. Clauses such as this are almost always present when there is an unequal bargaining position between the parties, and the person with the stronger bargaining position will insist on having its attorneys’ fees paid by you if they sue you and win, or if you sue them and you lose. Deciding whether or not to take the risk that such an agreement entails is a factor in whether or not you will do business with that person or entity. But that entity (say, MasterCard) isn’t going to change its contract just for you. 

However, there are some circumstances where you have some choice in the matter. You may be in a position in this type of circumstance to negotiate a “Loser Pays” clause into or out of the contract. If you have the ability to have such a clause included, should you do it? 

If there is a lawsuit, there will be a winner a loser. No matter how sincerely you believe you are right, you can lose. Many a client has been shocked to find that at the end of his $20,000 lawsuit in which he had every confidence of coming out ahead, he not only failed to win the $20,000, but he actually lost another $20,000 in attorney fees by the time he pays his own lawyer and the other side’s lawyer. 

That said, there are circumstances in which the result of the litigation is almost predictable. If a tenant doesn’t pay the rent, absent unusual circumstances the landlord will win and the tenant will lose. In a contract in which a default, if one comes, will almost assuredly be committed by the other side, you usually will want a “Loser Pays” clause in the contract if you can negotiate it. 

On the other hand, in contracts for which it is difficult to project from the start where the breach will come and which side is likely to be on the losing end, then you may wish to stay away from a “Loser Pays” clause. 

Another option is a “Loser Pays – Maybe” clause. It is possible to write contracts in a fashion that gives the court the power to order the loser to pay the winner’s attorney fees but the Court is not required to order the loser to pay. This language will provide, to the effect, that the court MAY award attorney fees to the winner and against the loser if, but only if, the court finds that the losing party while in good faith contesting the case failed to produce evidence substantially supporting its position.   

Whether to include a “Loser Pays” contract provision, and if so what kind of such provision, varies on a case to case basis. You should not routinely insist on, or refuse to agree to, such a clause without considering the context of your particular situation.