Prevailing Party Clauses: Why They Are Dangerous And Should Not Be Ignored
It is not uncommon to find a clause in a client’s agreement form that relates to responsibility for attorneys’ fees and litigation expenses. It’s common to see this towards the end of a contract, perhaps in a section entitled “Miscellaneous Provisions”. Possibly it’s contained within the dispute resolution provisions. Wherever it is located, by the time one comes to what is commonly referred to as a “Prevailing Party” clause, one’s brain can be tired. A Prevailing Party clause is a clause that many design firms don’t spend a great deal of time or energy negotiating. Many firms don’t see it as a critical clause, nothing worth fighting about. Isn’t a clause like this why firms buy insurance? Hopefully, you understand that in many instances, Prevailing Party clauses drafted by your clients are often totally uninsurable. Since litigation costs can be enormous, this is not a clause you want to ignore or pass over quickly. Cases arise regularly where one party agrees to an onerous Prevailing Party clause, only to find themselves paying a relatively small amount in damages, but a vast sum in legal fees. Very often, merely the threat of the massive expense of a legal squabble is enough to convince the architect or engineer to make a business decision to settle, even if they have little liability.
The origin of the Prevailing Party clause goes back to merry old England. England is usually thought of as the Mother Country of the United States. As such, many of the laws in the early colonies were borrowed from Mother England. One legal concept that the United States left behind when it became a sovereign nation involved the rule over which party was responsible for legal fees incurred during civil litigation. The longstanding “English Rule” held that the party who loses in the litigation pays the winning party their legal costs incurred in the lawsuit. The rationale behind the English Rule seems fair enough: if you sue me and I win, it’s only fair that you pay me for the legal fees I’ve incurred, because I won. If I sue you, and you win, fairness dictates that I pay your legal costs. Since most claims against design firms are resolved without any damages being paid out by the design firm, it might seem the English Rule would be preferable for the American design profession.