Attorney Fees by Contract

Given that attorney fees are not generally recoverable for breach of contract, and given that many jurisdictions do not allow for the recovery of punitive damages for breach of contract, and – above and beyond that – given the effect of the gist of the action doctrine on your chances of working a tort claim into what is otherwise an action for breach of contract (see Blog entry dated October 1, 2009), your best bet for recovering attorney fees in the event of a contract dispute is to put it in the contract.

A full description of how you might want to go about doing this is beyond a single blog entry, but a few starting considerations are listed below:

First, you should consider terms designed to reduce the overall costs of a dispute regardless of who wins. A leading mechanism for doing this is arbitration. Arbitration is a form of private dispute resolution that offers streamlined procedures and is, therefore, generally less expensive than proceeding through the court system. A drawback of arbitration is that, for most practical purposes, there are no appeals. Therefore, you are stuck with whatever the arbitrator(s) decide. For this reason, you might not want an arbitration provision in a contract that, if breached, would lead to a “bet your company” dispute.

Second, you should consider when you want liability for attorney fees (and associated expenses) to be triggered. Do you want it to trigger in the event of any breach? Just a material breach? Do you want to trigger it when a complaint is filed or an arbitration demand is made?

Third, consider interest. In a contract case for a specific sum, the winning side usually collects pre-judgment and post-judgment interest at a statutory rate (e.g. at this writing, six percent in Pennsylvania state courts). Chances are that the statutory rate will be substantially below the IRR you would seek from any significant economic investment with the risk factors associated with litigation. In the event of an action on a commercial loan, the appropriate rate may be more like the default rate. In that case, the provisions allowing for the recovery of attorney fees should be written to make it clear that the appropriate higher rate of pre-judgment and post-judgment interest applies to the attorney fee portion of the award.

Fourth, remember a clause governing award of attorney fees is typically a two edged sword. Parties entering into contracts with such clauses do not generally think that they will be the ones made to pay under them. In the event of a dispute, one of those parties is wrong. Make sure you’re willing to risk being on the paying end of whatever you agree to.

The information contained in this blog is not legal advice and should not be relied on as such. For legal advice or for answers to specific questions, please contact the blog's author.