Scenario: You had a contract dispute with a vendor regarding their breach. Your discussions with the vendor didn’t bear fruit. Unfortunately, you had to threaten litigation and you actually had to file a claim against the vendor which included drafting a complaint, a request for production, and interrogatories. The vendor finally acknowledged their breach and makes good. You get a bill from the attorney who your company engaged to go after the vendor. Who pays for your attorney’s fees?
Answer: Under the so-called “American Rule,” you could be on the hook for attorney’s fees even though your vendor was at fault and even though it was their foot-dragging that forced you to hire legal counsel. That is, unless you’ve contracted around the American Rule…
The American Rule isn’t as much a true rule as it is a concept enabled by custom and case law. The rule is that, unless authorized by statute or otherwise agreed upon in contract, each party to a dispute pays its own attorney fees. There are other very narrow exceptions to the American Rule, such as bad faith, which eviscerate the rule but that’s not important for discussion here—which is how to be “un-American” by contracting around the American Rule.
The rationale for the American Rule is that potential plaintiffs would arguably be discouraged from seeking legal recourse knowing that they would have to pick up attorney fees for the other party (the defendant) if the plaintiff lost.
So why call it the “American Rule?” Well, it’s uniquely American. In contrast to the American Rule, the “English Rule” in the United Kingdom and rules in many other countries award attorney fees and costs to the prevailing party. The rationale for the English Rule and similar rules is exactly opposite of the American Rule: a litigant (whether bringing a claim or defending a claim) is entitled to legal representation and, if successful, should not be out of pocket by reason of the litigant’s own legal fees.
Parties to a contract who don’t want the American Rule to apply can bind themselves (contractually) to the English Rule by writing into their contract a provision awarding attorney fees to the prevailing party, payable by the losing party. These provisions are often referred to as “fee shifting” or “attorney fees” provisions.
In a procurement context and from a buyer’s perspective, the question is whether to include an attorney fees provision. Generally, under a procurement contract, it’s more likely that a vendor will be the subject of a claim or lawsuit (meaning, either as the respondent or defendant) versus the customer. The reasoning is that a vendor has many obligations of performance under a procurement contract and a customer has a limited number (the main obligation being to pay the vendor). Thus, more often than not, it makes sense to include an attorney fees provision because the vendor will more likely be on the sharp end of a lawsuit. Just be mindful that, if the attorney fees provision is mutual—and it most likely will be—the buyer will be on the hook for paying attorney fees if the buyer doesn’t prevail on either a claim brought by the buyer or a claim brought by the vendor. So, if you have a procurement contract that, for whatever reason, puts you at legal risk as the buyer and has as a good possibility of your being on the losing end of a claim, you might want to reconsider contracting around the American Rule.
Another thing to keep in mind is that a party who makes a claim for breach of contract will not just incur attorney fees. There are also a multitude of potential “costs” associated with bringing a claim: court costs, fees for filing documents with the court, expert payments for court reporters, witness fees as well as costs of photocopying, printing, postage, telephone, messenger services, and travel
Remember that some jurisdictions have legislated exceptions to the American Rule, so check your jurisdiction. However, figuring out whether your jurisdiction has an exception or not is made moot by the virtue of your including an attorney fees provision in your contract.
Just to be clear, if your jurisdiction hasn’t legislated an exception to the American Rule and you don’t fall under some other exception (such as bad faith), if an attorney fees provision is not included in your contract, then each party has to bear the cost of paying its attorney fees and costs. What this means is, without the attorney fee provision, you could end up having to pay your own attorney fees and costs—even if you win.
Here are some examples of contractual exceptions to the American Rule. Some contemplate a litigation context and attorney fees only and some are much broader. The provision I prefer and use is the very last one. Use at your own risk!
- In any action incurred to enforce this Agreement, the prevailing party shall be entitled to reasonable attorney fees.
- In the event of litigation relating to the subject matter of this Agreement, the non-prevailing party shall reimburse the prevailing party for all reasonable attorney fees and costs resulting therefrom.
- Notwithstanding any other term or condition in this Agreement, in the event either party shall take any action to enforce this Agreement, the non-prevailing party in such action shall pay the prevailing party’s costs and expenses, including but not limited to, such party’s reasonable attorney fees.
- In the event either party shall take any action or institute any proceeding to enforce this Agreement and the terms and conditions agreed to herein, then the non-prevailing party in such action or proceeding shall, in addition to any indemnity obligations under this Agreement, pay the prevailing party’s expenses, including, but not limited to, reasonable attorney fees and costs incidental thereto, which may be suffered by, accrued against or charged to such prevailing party.
- In the event of any litigation arising from or related to this Agreement, including the breach of a party’s duties and/or obligations hereunder, the prevailing party shall be entitled to recover from the non-prevailing party all reasonable costs incurred including court costs, attorney’s fees, and all other related expenses incurred in such litigation. In the event of a no-adjudicative settlement of litigation between the parties or a resolution of a dispute by arbitration, the term “prevailing party” shall be determined by that process.
- In any mediation, arbitration, litigation, or other proceeding, informal or formal, by which one party either seeks to enforce this Agreement or seeks a declaration of any rights or obligations under this Agreement, the non-prevailing party shall pay the prevailing party’s costs and expenses, including but not limited to, reasonable attorney fees.