20 Jan Common Questions About Business Contracts, Part II – Prevailing Party Provision

In our last blog Edwards Law provided a sample business contract to demonstrate what a simple employee business agreement looks like.  Today we address one of the most important general provisions that should be included in all of your business contracts—an attorney fee or prevailing party provision.

What Is A Prevailing Party Provision?

The parties to a business contract usually aim to structure the contract in a way that motivates the parties to settle disputes amicably whenever possible, without litigation.  One way to do this is to allocate the cost of pursuing or defending a lawsuit (or alternative dispute resolution like arbitration) to the losing party in the dispute.   A “general” or “standard” provision that is used to accomplish this goal is called an “attorney fee” or “prevailing party” provision.

A prevailing party provision forces all parties to make an informed decision about whether to sue, and is aimed at preventing frivolous and unnecessarily lengthy lawsuits on issues that the parties should be able to easily settle out of court.

Sometimes a party to your contract (usually one who is more likely to be defending a lawsuit) will try to exclude a prevailing party provision, to prevent or deter you and your business from suing to bring meritorious claims.  Do not give in—it is almost always in your best interest to include a prevailing party provision because litigation is expensive!  If you have a prevailing party provision and the other side clearly breached the agreement, they will be forced to pay your court costs for having to sue on the contract.  Colorado courts will generally enforce a prevailing party provision if it clearly specifies the allocation of litigation expenses between the parties to the contract.  See Morris v. Belfor USA Grp., Inc., 201 P.3d 1253, 1260 (Colo. App. 2008).

What Does A Prevailing Party Provision Look Like?

A sample prevailing party provision is below.  Please note that by providing this sample provision, Edwards Law is not providing legal advice.  The facts behind your particular contract may warrant additional language not covered in this sample provision.  Also, this sample provision applies only to litigation costs and expenses and does not apply to transaction costs (e.g.,  due diligence costs; costs to negotiate the transaction, draft contracts and close the transaction).

Prevailing Party.  If any party to this Agreement initiates any legal action or legal proceeding against the other party to enforce this Agreement or to obtain any other remedy regarding any breach of this Agreement arising out of or relating to this Agreement (including but not limited to contract, equity, tort, fraud, and statutory claims), the losing party shall pay the costs and expenses incurred by the prevailing party in conducting the legal action or legal proceeding, including reasonable attorneys’ fees and expenses, and court costs, in addition to all other remedies to which the prevailing party may be entitled, even if not recoverable by law,  including but not limited to fees, taxes, costs, and expenses incident to appellate, bankruptcy, and post-judgment proceedings.

This prevailing party provision can and should be used with other important standard provisions in the contract, such as an indemnification provision, which we will address in our next blog.  An indemnification provision is a remedies clause which is used to allocate risk among the parties.   The parties to your contract should review the contract’s indemnification provisions to make sure they are consistent with you prevailing party provision in the reimbursement of attorneys’ fees, court costs, and other expenses, especially if you structure the indemnification provision to cover direct claims as well as third-party claims.

If your indemnification provision covers direct claims (typically in addition to third-party claims), make sure the indemnification provision exclusively governs the reimbursement of attorneys’ fees, court costs, and other expenses incurred by the indemnified party against the indemnifying party to recover losses regarding direct claims (and third-party claims, if applicable) covered under the indemnification provision.  For any other dispute not covered by your indemnification provision, it is should be clear that the prevailing party provision exclusively governs the reimbursement of attorneys’ fees, court costs, and other expenses by the prevailing party.

If your indemnification provision covers only third-party claims, make sure it is clear that it exclusively governs the reimbursement of attorneys’ fees, court costs, and other expenses incurred by the indemnified party against the third party in the third-party claim only.  It should also be clear that the prevailing party provision in your agreement governs the reimbursement of attorneys’ fees, court costs, and other expenses incurred by 1) the indemnified party against the indemnifying party to recover the costs and expenses of enforcing the indemnification provision to recover losses in third-party claims; and  2) the prevailing party in any other dispute not covered by the indemnification provision.

This sample prevailing party provision and the contents of this blog cannot serve as legal advice and should not be used without the advice of counsel.  Call Edwards Law today for a complimentary 20-minute consultation about your business contract needs.

Victoria Edwards is a skilled general business and litigation attorney with 16 years of experience litigating for and advising large banking and financial institutions, insurance/oil & gas/mining companies, construction companies, and various small businesses on complex business matters, including business contracts formation and interpretation, and novel bankruptcy issues.

With this substantial experience, Ms. Edwards now works with small businesses and entrepreneurs to anticipate potential issues with their business matters; draft business contracts; as well as to initiate and manage commercial and civil liability disputes concerning business contracts, commercial law matters, breach of contract and business torts, and unfair competition/unfair business practices/defamation issues.

Ms. Edwards is admitted to practice law in the state courts of Colorado, California, New York, and New Jersey.  She is also admitted to practice in the United States District Court for the District of New Jersey, the Southern and Eastern Districts of New York, the District of Colorado, the United States Bankruptcy Court for the District of Colorado, all of the District Courts and Bankruptcy Courts of California, and the United States Court of Appeals for the Eighth, Ninth, and Tenth Circuits.