Recovery of Litigation Fees in Contract Disputes: Will I Get My Money Back if I Win?
Many clients faced with a contract dispute ask the question: “will the other side have to pay my legal fees if I win?” The default rule is no, unless your contract says otherwise. If there is no applicable contract provision (nor a statutory entitlement to legal fees), each party must bear its own legal fees. This is known as the “American Rule,” as distinguished from the rule in Great Britain, where the default rule is the loser pays the winner’s legal fees.
Given the cost of litigation, this is a vitally important issue for just about every client. If you are seeking to enforce contract rights, or someone is seeking to enforce contracts rights against you, the contract may contain a provision stating that, in a nutshell, “if there is a dispute between the parties, the losing party shall pay the prevailing party’s legal fees.” This is often referred to as a “fee-shifting” provision, because it “shifts” one side’s litigation expenses to the other side. Some fee-shifting provisions can be one-sided, i.e. only one party, but not the other, is entitled to legal fees if there is a dispute. A contract may expressly say that each side bears its own legal fees in the event of a dispute, or it may be entirely silent on recovery of legal fees, which yields the same result: neither side is entitled to legal fees. The same rule will apply if the contract is not in writing – no legal fees to the winner.
For these reasons, in any transaction, whether in a consumer-business or business-to-business context, if it is practical, a party should look for a fee-shifting provision in the contract or consider whether one would benefit that party.
Not all fee-shifting provisions are the same; not by a long shot. Just like any contract provision, the parties’ words will control. Many times the dispute that spawned the litigation in the first instance becomes secondary to recovery of the legal fees, as one side will argue that the fee-shifting provision does not apply, or that only a portion of the legal fees are covered since the party did not “prevail” on all its claims. The scenarios are as wide ranging as a contract drafter’s mind. The bottom line is that in this U.S. legal system, recovery of legal fees in contract disputes is far from automatic. In fact, recovery of legal fees is the exception, not the rule.