Beware fee shifting contract clauses

Are they a good idea?

Lawyers drafting or reviewing contracts should carefully consider whether a fee shifting clause serves the parties’ interests. Sometimes, perhaps often, they do not.

Bonnie and Gus agreed that Gus would build a house for Bonnie. The house was to be built on a hillside. The contract price was $340,000. A retaining wall to support the house was built. The parties disputed whether the retaining wall would have a brick veneer. The veneer would cost $6,800. Bonnie claimed Gus should cover the cost. Gus disagreed. The parties went to court and eventually to a jury trial. Bonnie won and was awarded $6,800.

The contract included a fee shifting provision. The trial judge, when ruling on the motion for attorneys’ fees, said the relationship between the parties was “bitterly contentious.” The judge said, “legal theories were overly creative.” The judge said, “the file as a whole consumed vast amounts of attorneys’ time even though the amount in controversy may not have justified it.” The judge said that, although she didn’t believe it was necessary to have two attorneys for each side at virtually all court appearances, “that was the practice of both sides.” The judge basically said, “y’all did this to yourselves, and neither side can complain about how the case was litigated.”

The judge ruled that Bonnie was entitled to recover $201,255.50 for attorneys’ fees and costs. The Tennessee Court of Appeals affirmed. 

An observer might reasonably ask whether the fee shifting provision in the contract encouraged litigation instead of settlement. If both parties had known they were going to have to pay their own attorneys’ fees with no chance to recover those fees, would they have found a way to resolve this matter without going to court? Was the principle worth this risk and this cost? Would Bonnie (and the lawyers representing her) incur these legal fees over a $6,800 dispute if she had no chance to collect those fees? Would Gus (and the lawyers representing Gus) have done so? Or would both sides swallow their pride, hold their noses, and come to a resolution? These are good questions.

Sometimes lawyers should tell their clients not to include a fee shifting provision, especially the lawyer representing the side with deeper pockets. Fee shifting provisions, once litigation reaches a certain point, encourage both sides to roll the dice at trial.

Every employment defense lawyer has seen cases in which the case can’t settle because the attorneys' fees greatly exceed the amount for which the plaintiff would settle, or the amount actually in controversy. The purpose of fee shifting provisions in discrimination statutes is to encourage lawyers to enforce the discrimination laws through litigation by taking cases they otherwise wouldn't take. Regulation through litigation is the norm these days. Should we include such clauses in contracts to encourage litigation?

The argument can be made that fee shifting provisions should be included so the party with fewer resources can get representation. And one can argue that fee shifting provisions discourage litigation because they increase the risk of loss. That does make some sense. But do these arguments justify including fee shifting provisions in the corporate contract template?

Think on that.

Robin Shea has 30 years' experience in employment litigation, including Title VII and the Age Discrimination in Employment Act, the Americans with Disabilities Act (including the Amendments Act). 
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