What would you do if you were asked to sign a contract with the following provision?
In the event of any dispute arising under, or in connection with, this Agreement, the prevailing party shall be entitled to recover its attorneys’ fees, expert fees, and costs from the non-prevailing party at the hearing, pre-trial, trial, post-trial, and appellate levels.
Hidden risks
Attorneys’ fees and other court costs can be exorbitant, as was highlighted in a recent ENR article discussing a claim for $3 million in court costs pursuant to a prevailing party clause. But what exactly are prevailing party clauses?
Prevailing party clauses essentially state that the prevailing (or winning) party to a lawsuit will have their attorneys’ fees and other legal costs paid for by the non-prevailing (or losing) party to the lawsuit. In theory, this can benefit both parties by disincentivizing the pursuit of frivolous or groundless claims, thereby minimizing the time, costs, and resources required to resolve a dispute. In practice, however, it can create an unfair advantage to the party that’s financially stronger and create a chilling effect that prevents a financially weaker firm from pursuing their claims or appealing an unfair judgment.
Additionally, since contracts rarely define the term “prevailing party,” making that determination can be difficult and create another point of contention that prolongs legal proceedings and increases costs. It’s not unusual for disputes to encompass several different claims. When a party prevails on some but not all of the issues, who is considered the prevailing party—the party who recovers an affirmative judgment, the party who prevails on the significant issues of the case, or the party who prevails under some other measure?
The complexity of identifying the prevailing party was exemplified in Lemartec Corporation v. East Coast Metal Structures Corp, 391 So.3d 426 (Fla. 4th DCA 2024), wherein Lemartec Corp (contractor), along with the project owner, appealed a lower court ruling naming East Coast Metal Structures (subcontractor) as the prevailing party in an earlier dispute. In reaching this conclusion, the lower court reasoned that because the subcontractor was able to recover a money judgment for its work, and the contractor and project owner failed to avoid payment to the subcontractor altogether, the subcontractor had prevailed. On appeal, however, the court noted that this reasoning ignored the fact that of the subcontractor’s five asserted claims, the subcontractor only partially prevailed on one; and the contractor and project owner defeated and therefore avoided paying for most of the subcontractor’s claimed damages. Accordingly, the appellate court reversed the lower court’s finding and remanded the case for a determination of the legal fees the contractor and project owner were entitled to pursuant to the prevailing party clause and two Florida state statutes allowing for the award of attorneys’ fees and other costs in this case.
For the reasons listed above, prevailing party clauses should be avoided. This is particularly true if the contract language seeks to give your client a one-sided right to recover their legal fees in the event the client prevails, without granting reciprocal rights of recovery to your firm should you prevail in the dispute.
Coverage concerns
The obligation to pay the opposing party’s legal fees can also result in significant uninsured exposures under your professional liability (PL) insurance policy. Attorneys’ fees and other legal costs are typically not awarded to the prevailing party under the US legal system. Instead, each party bears responsibility for their own costs, unless an exception applies. Consequently, if your firm is held liable for another party’s legal fees because of a prevailing party clause in your contract, this could trigger the exclusion for contractually assumed liability in your PL insurance policy.
All PL policies contain an exclusion for contractually assumed liability that would not exist in the absence of the contract. What does this exclusion mean and why does it exist? Well, just as you price your services according to the scope of services being offered and the associated risks for that project, insurance companies price premiums according to the scope of coverage being provided. Professional liability insurance policies are designed to protect you against the immutable responsibility you have to exercise reasonable skill and care in the performance of your services. Your scope of coverage is tailored to this obligation imposed upon you by law and forms a key component for how your PL insurance premiums are calculated. You are, however, free to contractually assume broader responsibilities and risks in your professional services agreements if you so choose. The exclusion for contractually assumed liability that would not exist in the absence of the contract recognizes this and places you on notice that the additional exposures and liabilities you assume are not contemplated in the scope of your PL coverage or premiums. Therefore, if you agree to a prevailing party provision, it can trigger the exclusion for contractually assumed liability that exists in all PL policies and create a significant uninsured exposure for your firm since legal fees, as previously discussed, can be staggering.
Managing the risks
Avoid prevailing party obligations as they can create coverage concerns under your firm’s PL policy. If you decide to take on the business risk and uninsured exposure associated with a prevailing party clause, consider crafting it in a way to minimize the firm’s exposure. For instance, you can limit the obligation to reasonable attorneys’ fees and costs or make it a mutual right rather than a one-sided right in the client’s favor. A mutual right allows either party to recoup attorneys’ fees and costs in the event they prevail, as opposed to a one-sided right that allows only your client to recoup their costs if they prevail. Additionally, consider working with your attorney to define how the prevailing party shall be determined in the event of a dispute or claim. Your firm’s attorney can also provide guidance on any jurisdiction or firm-specific matters to consider as they assist you in drafting the appropriate language.
Additional resources
Prevailing party clauses are one of the many issues that can be reviewed and identified using Victor’s Contract Sifter, our automated contract review tool, available exclusively to our policyholders. You can learn more about Contract Sifter and the other resources we provide to help our policyholders manage and mitigate their risks.