Many San Diego businesses want to protect themselves in the event of litigation with respect to business contracts. Often business contracts contain an attorney fees clause whereby the losing party in the litigation is forced to pay the attorney’s fees and litigation costs of the other party. Under most cases, absent a statute or a contractual provision, if there is litigation, each party must pay its own litigation costs including attorney’s fees. But, by contract, you can require the other party to pay. These are often called “fee-shifting provisions.” A typical fee-shifting clause might read like this:

Fee Shifting — If COMPANY A is required to file litigation to enforce this Agreement and if it is the prevailing party, in addition to all other damages, COMPANY A shall be entitled to receive its reasonable attorneys’ fees, litigation expenses and other costs not otherwise awardable from COMPANY B.”

Note that this particular version is a one-sided fee-shifting provision. A mutual fee-shifting provision would state something like “in the event of litigation, the PREVAILING PARTY shall be entitled to recover” fees and costs.

Drafting a good fee shifting provision is complicated and you should seek the advice and counsel of an experienced San Diego corporate attorney if you want to include such clauses in your contracts or if you are being asked to sign a contract with such a clause. There are important nuances such as what are “litigation expenses,” should the word “reasonable” be added and what are “costs not otherwise awardable?” A good corporate attorney can help.

There is another problem that is actually quite common: how is “prevailing party” defined? Most think of litigation as a process with a clear winner and loser. But that is often not the case. Litigation is complex, potentially involving many theories of recovery, amended pleadings, counter-claims, settlement efforts, and verdicts from judges/juries that award something to both sides. Further, some lawsuits become extremely complex with many sets of parties and third parties. As a simple example, suppose a breach of contract lawsuit is filed against a corporation and its main shareholder. In the end, the plaintiff wins a small judgment against the corporation, but not against the shareholder. Who is the “prevailing party”? Or maybe, how many “prevailing parties” are there?

As can be seen, it is important to consider defining “prevailing party” in your fee-shifting provisions. An example might look like this:

“Prevailing party” shall be defined as that party which has succeeded the most based on an assessment of the following: net recovery; injunctive relief ordered or not ordered; success or failure on primary arguments/legal claims being made; whether the net recovery is a significant percentage of the total recovery sought by that party; and the net recovery compared to the most recent settlement positions of the parties. If the parties dispute who is the “prevailing party,” the court shall make the determination.

Contact San Diego Corporate Law Today

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard has been named a “Rising Star” for four years running by SuperLawyers.com. Mr. Leonard provides a full panoply of legal services for businesses and proudly serves the San Diego business community. Like us on Facebook.

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