Contract Provisions Regarding Recovery of Attorneys’ Fees Are Critical

A recent case from the Colorado Supreme Court-Planning Partners Int’l, LLC v. QED, Inc., No. 11SC961, 2013 CO 43 (Colo. July 1, 2013)-highlights the importance of contractual provisions providing for the recovery of attorneys’ fees, and the language used in those provisions.

As many business owners and executives know, Colorado law, like that in most states, generally provides that each party to a commercial lawsuit pays its own legal fees, win or lose. A significant exception to the general rule, however, is that parties may contractually agree to terms for recovery of attorneys’ fees in the event of a dispute. In light of this exception, contracts often provide that, in the event of a dispute, the prevailing party recovers its reasonable attorneys’ fees from the opposing party. Such “prevailing party” provisions often are reciprocal, applying to both parties to the contract, but sometimes are unilateral, operating in favor of only one contracting party.

The Colorado Supreme Court’s recent Planning Partners case addressed such a provision. Planning Partners was the prevailing party in the case, and, based on the attorneys’ fees provision in the contract, was awarded $188,748.80 in attorneys’ fees. QED argued that Planning Partners was not entitled to all of the attorneys’ fees awarded, and asserted that, because QED had prevailed on a counterclaim against Planning Partners, the fees had to be proportionately reduced. The Colorado Supreme Court disagreed, and emphasized in its decision that trial courts have wide discretion in awarding attorneys’ fees pursuant to contractual provisions providing for the recovery of reasonable attorneys’ fees.

The Planning Partners decision, thus, is a good reminder that business owners and executives should think carefully about whether to include provisions addressing attorneys’ fees in their contracts, and, if so, the terms of those provisions. Including such provisions can have many beneficial effects. For instance, a provision allowing the prevailing to recover its attorneys’ fees increases for both parties the risk associated with lawsuits, and should incentivize parties to act rationally in resolving disputes without the need for lawsuits. As another example, a provision permitting one party to collect its fees, but not permitting the other party to do so, significantly disincentivizes the party not entitled to collect from pursuing a lawsuit. Myriad other options exist with regard to potential terms for attorneys’ fee provisions, including: provisions that cap or kick-in at predetermined dollar amounts; provisions that go beyond the recovery of attorneys’ fees, and also include other costs of litigation; and, provisions that only kick-in if the prevailing party recovers more than offered in settlement.

Because of the important role attorneys’ fee provisions play in commercial contracts, remember not to think of the provisions as boilerplate, and take time to analyze the provision best suited to your circumstances in each instance.