A standard piece of boilerplate is a provision stating that the prevailing party in any dispute is entitled to recover costs. Such a provision might look something like this:
Recovery of Expenses. In any adversarial proceedings between the parties arising out of this agreement, the prevailing party will be entitled to recover from the other party, in addition to any other relief awarded, all expenses that the prevailing party incurs in those proceedings, including attorneys’ fees and expenses.
As a general matter attorneys’ fees are not recoverable in a commercial contract dispute unless provided for by statute. So if with respect to a given transaction you want to recover expenses, you should say so in the contract.
But one problem with such provisions is that the meaning of “prevailing party” has “spawned a great deal of litigation.” Robert L. Rossi, 1 Attorneys’ Fees § 6:8 (3d ed. 2010). If the plaintiff voluntarily dismisses its action, has the defendant prevailed? If a party’s case has been dismissed for want of jurisdiction, is has the other party prevailed? What if both a complaint and a counterclaim have been dismissed? If the plaintiff has recovered on its complaint against the defendant and the defendant has recovered on its counterclaim against the plaintiff, is the prevailing party the party in whose favor a net judgment was entered, or are both parties entitled to recover? Is a decision required, or can you prevail in a settlement or consent decree? Is a money judgment required, or do equitable remedies qualify? And to be the prevailing party in a dispute, do you have to succeed on all issues, or just some? Those are just some of the issues that can arise.
A stroll through EDGAR suggests that most expenses-recovery provisions don’t attempt to address any of these issues. That seems unhelpful. On the other hand, you wouldn’t want to weigh down such provisions with lots of verbiage. The following extracts from EDGAR show how some drafters have attempted to address these issues:
- The term “prevailing party” means that party, as plaintiff or defendant, who substantially prevails against the other party. Notwithstanding the foregoing, if a written offer of compromise made by either party is not accepted by the other party within thirty (30) days after receipt and the party not accepting such offer fails to obtain a more favorable judgment, the non-accepting party shall not be entitled to recover its costs of suit and reasonable attorney’s fees and costs (even if it is the prevailing party) and shall be obligated to pay the costs of suit and reasonable attorney’s fees and costs incurred by the offering party.
- The “prevailing party” means the party in whose favor a judgment, decree, or final order is rendered.
- The term “prevailing party” means the party obtaining substantially the relief sought, whether by compromise, settlement or judgment.
- For purposes hereof, prevailing party means the party in whose favor final judgment, after appeal (if any), is rendered with respect to the claims asserted in any such action or proceeding.
- As used in this Agreement, the term prevailing party means that party whose position is upheld in a final judgment rendered in any litigation, or, if the final judgment is appealed, that party whose position is upheld by the decision of the final appellate body that considers the appeal.
- For purposes of this Agreement, “prevailing party” means the party who receives any type of compensation or consideration regardless of whether any court decision or arbitration was obtained.
- As used herein, the term prevailing party means the party who, in light of the claims, causes, or action, and defenses asserted, is afforded greater relief.
- For purposes of this Agreement, “prevailing party” means the party that prevails (whether affirmatively or by means of a successful defense) with respect to claims having the greatest value or importance as reasonably determined by the court.
- For purposes of the foregoing, (i) “prevailing Party” means (A) in the case of the Party initiating the enforcement of rights or remedies, that it recovered substantially all of its claims, and (B) in the case of the Party defending against such enforcement, that it successfully defended substantially all of the claims made against it, and (ii) if no Party is a “prevailing Party” within the meaning of the foregoing, then no Party will be entitled to recover its costs and expenses (including attorney’s fees and disbursements) from any other Party.
- For purposes of this Section 7.8, “prevailing party” means the net winner of a dispute, taking into account the claims pursued, the claims on which the pursuing party was successful, the amount of money sought, the amount of money awarded, and offsets or counterclaims pursued (successfully or unsuccessfully) by the other Party. If a written settlement offer is rejected and the judgment or award finally obtained is equal to or more favorable to the offeror than an offer made in writing to settle, the offeror is deemed to be the prevailing party from the date of the offer forward.
- The “prevailing party” means any party (one party or both parties, as the case may be) determined by the arbitrator(s) or court to be entitled to money payments from the other, not necessarily the party in whose favor a judgment is rendered.
- The “prevailing party” means the party determined by the arbitrator(s) or court, as the case may be, to have most nearly prevailed, even if such party did not prevail in all matters, not necessarily the one in whose favor a judgment is rendered.
- For purposes of this § 13.14, the term “Prevailing Party” means that Party in whose favor any monetary or equitable award is made or in whose favor any dispute is resolved, regardless of any settlement offers.
- For purposes of this Section 13.11, “prevailing party” means the net winner of a Dispute, taking into account the claims pursued, the claims on which the pursuing party was successful, the amount of money sought, the amount of money awarded, and offsets or counterclaims pursued (successfully or unsuccessfully) by the other Party. If a written settlement offer is rejected and the judgment or award finally obtained is equal to or more favorable to the offeror than an offer made in writing to settle, the offeror is deemed to be the prevailing party from the date of the offer forward.
After chewing them over, I see three main alternatives:
First, you recover if you get a judgment or any kind of dismissal. That has the benefit of being clear-cut, but it would allow a party to recover fees even after failing to prevail on most of its claims.
Second, you recover if you get substantially what you had sought. That has fairness in its favor, but given its vagueness, a court would likely have to decide this.
Third, you recover if you’re the net winner, regardless of what you had sought. So if you win one claim out of 20 and recover $10 and the other party wins its one claim and gets $9, you’re the net winner. If the idea is to encourage efficient resolution of claims, I’m not sure how fair this is.
So perhaps Koncision should offer users options one and two.
I think it makes sense to require a judgment (or the arbitration equivalent) or any kind of dismissal, because only when you have formal proceedings do people start spending real money.
But I can see the value of saying that if you turn down a settlement offer and end up with a decision that gives you less than had been offered, you recover none of your expenses. So I have in mind offering that as a Koncision option.
I won’t go public with any proposed language until I’ve chewed this over some.
Interesting post.
One potential difficulty with your option 1 is that it does not resolve the scenario in which the defendant counterclaims unsuccessfully but defeats the plaintiff’s claim (thus, both sides obtain a judgment or dismissal). With counterclaims, there are several ways to end up with each side satisfying the “prevailing party” definition.
The “net winner” approach addresses the counterclaim scenario, but as you note, is potentially unfair. One way to avoid that unfairness is to cap recoverable costs. E.g., the total amount of recoverable costs shall not exceed the net monetary award in favor of the prevailing party. That’s a sensible solution, because it’s hard to justify spending more than a dollar to get a dollar.
Of course, the net winner approach only works well in money damages cases; if a party wins specific performance or rescission or any other equitable remedy, it may be difficult to identify the net winner without involving the court.
In addition to EDGAR, you might look at state court rules on these matters (there is no federal rule or statute that defines “prevailing party”). For example, California Code of Civil Procedure 1032 has a fairly comprehensive definition of “prevailing party.” While it may not satisfy everyone, courts have already interpreted it, providing (one hopes) greater predictability in the event of a dispute. Similarly, there are rules for cost shifting when a party spurns a settlement offer but fails to do better. FRCP 68 is one such device (but applies only to defendants’ offers); California Code of Civil Procedure 998 is another (and is bilateral).
Finally, a contracting party should be mindful (as I think you are in the MSCD 12.11) that “arising out of this agreement” might not reach tort claims that are connected to the agreement. If you want the benefit of fee shifting in any dispute, you probably need to be more specific. And if you want to limit fee shifting solely to actions for breach or to compel performance, “arising out of” would not be your first choice.
Taking a step back, is a clause covering costs even necessary? I find it hard to think of particular examples of instances where, at the point a contract is signed, it is necessary or fair for the normal rules governing cost orders to be amended. If there are particular problems with the normal rules in certain jurisdictions, I would be interested to hear them.
My general feeling is that this whole issue is an egregrious example of over-lawyering – clients seem to be paying money to have the situation made worse in terms of both clarity and fairness.
It’s not over-lawyering when the cost of enforcement exceeds the cost of any potential recovery. I find that it is a particularly effective means of coercion in low-dollar contracts or contracts in which damages might be hard to prove or small.
Obviously, such a clause is only significant in jurisdictions where parties usually pay their own way, like the U.S.
There is definitely a analysis that has to go into adding such a clause.
As to how to define “prevailing party,” I usually don’t try since there is a lot of case law regarding who a “prevailing party” under lots of different situations — the language usually found in statutes regarding extraordinary awards of attorney’s fees. If anything, trying to decide who a prevailing party is might move into the “over-lawyered” side of the line if it adds too much.
Interesting – in the UK, the loser usually has to pay a significant portion of the winner’s costs, and judges assess how much will be paid on the basis of established guidelines. In my ignorance, I had assumed it would be much the same elsewhere!
“It’s not over-lawyering when the cost of enforcement exceeds the cost of any potential recovery.”
Hahaha, that’s _exactly_ when it’s over-lawyering.
California law defines it. See Civil Code Section 1717:
(b) (1) The court, upon notice and motion by a party, shall determine who is the party prevailing on the contract for purposes of this section, whether or not the suit proceeds to final judgment. Except as provided in paragraph (2), the party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract. The court may also determine that there is no party prevailing on the contract for purposes of this section.
(2) Where an action has been voluntarily dismissed or dismissed pursuant to a settlement of the case, there shall be no prevailing party for purposes of this section.
Where the defendant alleges in his or her answer that he or she tendered to the plaintiff the full amount to which he or she was entitled, and thereupon deposits in court for the plaintiff, the
amount so tendered, and the allegation is found to be true, then the defendant is deemed to be a party prevailing on the contract within the meaning of this section.
Where a deposit has been made pursuant to this section, the court shall, on the application of any party to the action, order the deposit to be invested in an insured, interest-bearing account Interest on the amount shall be allocated to the parties in the same proportion as the original funds are allocated.
Jeff: Thanks for pointing that out; and commenter FN mentioned some other relevant California statutes. And under California law, a contract provision that’s inconsistent with the statutory definition of prevailing party will be void. Ken
Timely post. I was in a CLE last week discussing “boilerplate” provisions and the attorneys’ fees/prevailing party provision was discussed.
The presenter referenced two 2007 cases (one from IL (Chapman v. Engel) and one from NY (D.A.S. Contract in Court v. Nova Casualty Company) (no citations provided)).
In the Chapman case, the underlying contract provided attorneys’ fees for the party that prevailed in litigation due to the default of the other party. The court awarded damages to the plaintiff but did not rule that the defendant defaulted. Consequently, the plaintiff was unable to recover their attorney fees.
In D.A.S., the court stated that, in order to determine whether a party prevailed, they must “prevail upon the central litigated issues and obtain substantial relief”. Since the plaintiff recovered less than half of the damages sought ($312K on a claim for $716K), there was not “substantial relief” and, therefore, plaintiff’s claim for attorneys’ fees was denied.
The prevailing party provision should encourage settlement so a plaintiff seeking to recover a nominal amount will not use the prevailing party provision to coerce a higher settlement. It is not overlawyering to anticipate this likely scenario rather than relying on unsettled case law.
Joan Riordan
Now that more than a year has passed, what are your solutions? Option 1 is just as vague (might both parties get a judgment?) as Option 2.
If the goal of the parties is to reduce litigation, and the judge has now heard all the evidence and arguments, a judge should be able to rule on “substantially recovered”.
E: The questionnaire for Koncision’s confidentiality-agreement template asks whether the user wants to provide that the prevailing party in any dispute is entitled to recover expenses. If the user answers “Yes,” the user is then asked if he or she wants to specify what “prevailing party” means. The answers offered are option 1, option 3, and “No.” Three paragraphs of guidance indicate the perils of trying to define “prevailing party” in advance. Ken
A couple of reflections on the basic “recovery of expenses” provision:
1 FN’s issue about torts: perhaps starting the provision “in any adversarial proceedings, including tort claims, between the parties” would suffice. Since I try to shun phrases using “including” to introduce one or more examples of one or more previous generalizations, I would probably say “in any tort or other similar or dissimilar adversarial proceedings between the parties.” (See paragraph 4 below for more on “including.”)
2 What exactly is “is entitled to recover” supposed to convey? Is it the same as “the non-prevailing party shall pay”? If so, isn’t the latter formulation preferable? The possible objection to the latter formulation that it fails to envision a court deciding the issue seems groundless
3 Does “attorneys’ fees and expenses” mean “attorneys’ fees and attorneys’ expenses”? I assume so, or else the “expenses” after “attorneys’ fees” would be redundant of the basic generality “expenses” recited before the word “including.” If the assumption is correct, what’s the purpose of special mention of attorneys’ expenses? Is the idea that if the client pays an expert witness fee directly, it’s reimbursable under the first “expenses” and not excluded just because the lawyer pays it in the first instance (“attorneys’ expense”?) and bills the client for the disbursement?
4 This is a little off topic, but the use of “including” in the basic “recovery of expenses” provision reminds me of the following:
(a) I am aware of your position, Ken, on “including” expressed in MSCD. I think of it as “the disciplined use of ‘including,'” parallel to your suggested “disciplined use of ‘shall'” and the similarly restricted use of “agree” and “hereby.” But the MSCD-proposed use of “including” troubles me, primarily because it’s idiosyncratic without warning to contract readers.
(b) I can think of two other approaches. The first is never to use “including,” but instead to put the general word last, after the examples: “the vendor may sell apples, oranges, tomatoes and all other similar and dissimilar fruit.” Caution suggests using the phrase “similar and dissimilar”; the response to the objection that the phrase is tedious, especially when often repeated is that it’s no more tedious than the phrase “one or more” repeated as often as needed in other contract contexts. If it’s necessary, too bad about the tedium.
(c) The other approach would be a drafting convention unlike the one rejected in MSCD. This would read along these lines: “Including” never limits the words it modifies. For example, “fruit, including tomatoes” means the same as “tomatoes and all other similar and dissimilar fruit.” That would permit the simple use of “including” elsewhere in the contract with no fear of ejusdem generis.
The second approach also makes use of a short example to clarify the abstract statement, a technique that might also work in other drafting contexts, such as clarifying time periods (I assume terminal business days will be dealt with in a drafting convention):
• The Buyer may exercise the Option within ten days after notice is complete. For example, if notice is complete on day one, the last day to exercise the Option will be day eleven.
• The Tenant shall notify the Landlord of any change of the Tenant’s address within seven days after the change. For example, if the change takes place on day one, the last day for timely notice will be day eight.
A drafting convention might be desirable to the effect that in calculating periods of time, examples trump other methods. This would keep odd constructions of abstract time statements from creating conflicts with the corresponding examples. Or more precisely, it would say how to resolve any such conflicts.
Thanks for this. Excuse me if I don’t respond immediately: I’ll put off reading this until I next wrestle with “prevailing party,” which should be in a couple of weeks.
why is the definition of ”Prevailing Party” in this article:
http://www.lawpipe.com/california/California_Prevailing_Party_Definition.html
different from the above article ?
What about a situation in which Defendants are the “prevailing party” but a cost bill is filed by their attorneys asking for payment of the law firm’s costs that were not borne by the Defendants themselves? Can attorneys representing a client claim costs even though they are not a named party in the lawsuit at all?
Re: Contracts (Arizona): If a settlement offer contains conditions outside the scope of the contract, is it a valid settlement offer for shifting attorney fees and cost? Example: Defendant offers a dollar settlement amount, but requires a release which includes other conditions (say non-disparagement and non-disclosure clauses, but could be anything outside the current contract scope).: The inclusion of those clauses is a non-starter for Plaintiff, as it puts Plaintiff at greater risk.. Plaintiff rejects the settlement.. At trial Plaintiff recovers slightly less than the settlement offer. Defendant argues they are due attorney fees because the settlement offer was greater than the award.
I argue it is not a valid settlement offer since it is outside the contract scope. If allowed, Defendant can include any condition in the settlement offer (e.g. poison pills), knowing Plaintiff will reject — placing Defendant in a more advantageous position for potential recovery of attorney fees.
Case law supporting?