A developing trend in professional service agreements is to include a provision that shifts the burden of the “prevailing party’s” attorney’s fees on to the “non-prevailing party”. The language usually looks something like, “In the event of any claim between the parties the non-prevailing party will pay the prevailing party’s attorneys fees, costs and expenses”.
At first blush, this provision and its burden shift might seem reasonable. After all, the consequences apply equally to both parties and it seems to offer the benefit of reducing frivolous litigation. In practice, however, shifting the burden of defense fees rarely benefits the design professional. Here’s a quick look at why.
The primary problem is one of coverage. Agreeing to pay the legal fees of another party is the assumption of liability by contract. This assumption of liability is typically excluded under professional liability policies for design professionals. Without that coverage, the prospect of paying legal fees out of one’s pocket changes the negotiation dynamic significantly in any legal action. The mere threat of paying the other side’s legal fees can provide substantial leverage to the opposing party. Keep in mind that defense fees can easily equal or exceed the settlement value of any case.
In cases where the client is not willing to waive this burden shift requirement, the design professional should seek a clear definition of “prevailing party” that provides them some negotiating room. For example, the “prevailing party” might be defined as the recipient of a final adjudication by a court of competent jurisdiction including all post trial motions and appeals. One should also, in these cases, attempt to secure a limitation of liability of the defense expenses to an amount that is manageable.
In his article, Template of Reasonable Contract Clauses for Design Professionals; published in ProNetwork News in 2016 Kent Holland offers the following as a potential compromise.
“Prevailing party” shall be defined (1) as a claimant that is awarded net 51 percent of its affirmative claim, after any offsets for claims or counterclaims by the other party, and (2) as a defendant/respondent against whom a net award of 50 percent or less of a claimant’s claim is granted. In claims for money damages, the total amount of recoverable attorney’s fees and costs shall not exceed the net monetary award of the Prevailing Party.”
While, language like the above is helpful in reducing the exposure, the obligation is still an uninsured undertaking and should be avoided if at all possible.
Architects and engineers understand the value of precision in assuring success. Getting the words right in a prevailing party provision at the start of a project can avoid a world of problems down the road.