Attorneys’ Fee Clauses:  Who is the Prevailing Party?

2130813_sContracts often contain clauses that, in the event of litigation, allow the prevailing party (i.e., the winner) to recover its attorneys’ fees and costs from the other side.  The following is a typical fee-shifting provision addressing such recovery:

“In the event of litigation relating to the subject matter of this Agreement, the prevailing party shall be entitled to receive from the other party its reasonable attorneys’ fees and costs.”

Attorney fee clauses are important mechanisms to discourage frivolous lawsuits and promote amicable resolution of disputes, but such clauses—including the example above—commonly err by neglecting to define what it means to be the so-called “prevailing party.”  Without further definition or explanation, the term “prevailing party” suggests that the litigation at issue will result in an easy-to-determine winner and loser.  But the results of litigation are seldom that clear.

Consider a lawsuit, for instance, where a subcontractor sued a general contractor for $1,000,000 in damages.  Following a trial, the jury found in favor of the subcontractor but only awarded it damages in the amount of $10,000.  Under this scenario, which party is the prevailing party?  Did the subcontractor prevail even though it recovered only a tiny fraction of the amount it sought?  Similarly, what if the jury had awarded a larger amount, but the award was still less than the settlement amount offered by the defendant prior to the start of trial?  Who is the prevailing party then?

Absent further definition within the contract, courts and arbitrators commonly hold that the “prevailing party” is the party that obtains a net recovery against the other, regardless of whether it obtained only a small portion of the amount sought or recovered less than a prior settlement offer.  Under certain circumstances, such a simple, closed-minded interpretation can lead to unpredictable and inequitable results that improperly reward a litigant that grossly inflated its claim or maintained an unreasonable settlement position.

In order to assist the court or arbitrator in fairly determining the prevailing party, a contractor should consider drafting an attorney fee provision that, at a minimum, sets forth the factors that the court or arbitrator should consider.  Here is an example of one such provision:

The prevailing party shall be determined based upon an assessment of which party’s arguments or positions could fairly be said to have prevailed over the other party’s arguments or positions on major disputed issues in the arbitration or at trial.  Such assessment should include evaluation of the following:  the amount of the net recovery; the primary issues disputed by the parties; whether the amount of the award comprises a significant percentage of the amount sought by the claimant; and the most recent settlement positions of the parties.

Alternatively, a contractor may wish to leave even less discretion with the court or arbitrator by directly tying the prevailing party with the final settlement position of the parties.  This is particularly true when the contractor fears being subjected to an inflated claim or an unreasonable opponent.  Here is an example of a clause that addresses such concerns:

The prevailing party shall be determined by comparing the amount awarded, including interest (if any), with the last settlement position of the respective parties.  Offers or demands prior to the last settlement position shall not be considered.

By linking the recovery of attorney fees to the parties’ respective settlement positions, such a provision is likely to produce more predictable and equitable attorney fee awards while, at the same time, encouraging reasonable settlement positions by both parties.

Attorney fee clauses are important provisions that can deter frivolous or over-reaching claims, encourage prompt resolution, and properly reward the successful litigant.  Nevertheless, such provisions should be drafted and considered carefully.  By neglecting to establish standards for the court or arbitrator to use in determining the prevailing party, the advantages of such fee–shifting clauses can often be lost—with potentially severe and unintended consequences.