The Majority of Contracting Parties Don't Believe in the American Rule

DraftingTags American RuleUnilateral Fees Provisions

Attorneys’ fees and court costs (Fees) are generally the biggest inhibitors when considering whether or not to file a claim for breach of an agreement as such Fees are often greater than the amount surrounding the dispute. One way to ensure an adequate remedy is available to the non-breaching party is to include a Fees provision that grants recovery of Fees to the prevailing party. In the United States, without including a Fees provision within a contract, the default American Rule will apply. Under the American Rule, each party is responsible for paying its own Fees unless a statute or contractual provision permits otherwise. The United States is an outlier in defaulting to the American Rule as the rest of the Western world defaults to the English Rule, which provides that the non-prevailing party must pay the prevailing party’s fees. Some parties take the English Rule even further by inserting a one-way fee-shifting clause known as the unilateral fee provision that allows one party the ability to recover Fees if they prevail but does not provide the same remedy to the other party. Unilateral Fees provisions are generally found when one party has superior negotiating leverage such as in a landlord/tenant relationship. Some states have deemed this type of clause unconscionable and have statutes restricting the use of unilateral fees provisions.

A study conducted by Cornell Law Review in 2013 found that after analyzing over two-thousand contracts filed with the Securities and Exchange Commission (SEC), 60% of those contracts had fees provisions overriding the American rule. You may ask if an overwhelming majority of contracts override the American Rule, why is American Rule still the default? The main argument that has successfully defended any changes or modifications to the American Rule proposes that the English Rule places middle-income individuals at an unfair disadvantage and deters them from pursuing reasonable claims or defenses. Of course, this is heavily debated as many propose that there are far greater economic and social factors for preferring the English Rule over the American Rule. One factor being that the English Rule reduces a party’s incentive to drive up Fees since the non-prevailing party will be on the hook for paying such Fees.

Notwithstanding any public policy arguments, it is generally a good practice to include a Fees provision in commercial contracts. As stated above, the main advantage for including such provision is a way to provide an adequate remedy in cases where the disputed amount may be less than the Fees. Although it may be worth determining if the opposing party has the financial capability of paying legal fees if a dispute were to arise. Additionally, a fee provision may deter unmeritorious claims.

When drafting, reviewing, or revising Fees provisions, it is important to note that courts interpret the clause narrowly given that the American Rule is preferred. The language must be clear and unambiguous. Any ambiguity could lead to broad interpretation. For example, if the provision states that the prevailing party will be entitled to recover reasonable attorneys’ fees from the non-prevailing, who is the prevailing party? What happens if the plaintiff dismisses the action? What if there is a settlement or consent decree? What if there are multiple issues at stake? Can you recover if you prevail on one and not the others? To avoid ambiguity and to allocate risk appropriately, define the prevailing party, and list the categories of relief that may be afforded to the prevailing party. Failing to do so may lead to unintended consequences.

Here is an example definition of prevailing parties: "For purposes of this Agreement, a party is “prevailing” if that party prevails on the central issue raised in the action or claim, regardless of the number of damages awarded or defended, if any. A party may prevail by judgment or decision in that party’s favor, consent decree, settlement, agreement, or voluntary dismissal with or without prejudice."

Happy drafting!

 

References:

https://lawreviewdrake.files.wordpress.com/2015/06/lrvol61-1-bright.pdf

https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=3261&context=clr

https://www.adamsdrafting.com/what-does-prevailing-party-mean-2/

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