As a business litigation attorney, I sometimes have the unpleasant task of informing clients that their “breach of contract” case is not worth pursuing because the legal fees and costs to pursue legal action are likely to exceed the recoverable amount in their case. With some foresight when entering contracts, the smart businessperson can avoid this problem of uneconomical enforcement by including appropriate contract provisions, particularly “liquidated damages” and “attorneys’ fees” provisions. Such provisions go a long way in making breach of contract claims worth pursuing.
A “liquidated damages” provision sets out the specific amount of money damages that the parties agree, in advance, would be fair compensation for a breach of particular contract terms. An “attorneys’ fees” provision confirms the parties’ agreement for the payment of attorneys’ fees to the “prevailing party” in any lawsuit, along with any other damages. Taken together, these two provisions often make pursuing litigation a very reasonable proposition. However, the language must be artfully drafted to be enforceable and effective.
Liquidated damages provisions are frequently invalidated by Courts where it appears that the agreed amount of liquidated damages bears no reasonable relationship to actual damages. Excessive liquidated damages are often deemed “punitive”, rather than compensatory, and therefore, may be rejected by Courts. Careful drafting of a liquidated damages provision, setting forth with particularity the factual basis for the agreed damage amount, and the reasons calculation of actual damages would be impractical, can greatly improve the chances of enforcement by a Court. The old saying, “pigs get fat, hogs get slaughtered”, applies. Don’t be a hog! Choose a reasonable liquidated damage amount, explain why calculation of actual damages is difficult or impossible, and a Court will likely enforce your liquidated damages provision. Choose an excessive number, or offer no justification for not proving actual damages, and you may be disappointed i.e. slaughtered. For more information, see our previous blog article on Liquidated Damages here.
Throughout the United States the so-called “American Rule” is that, in civil litigation, both sides must pay their own attorneys, win or lose. However, parties to a contract can agree otherwise, and it is standard practice for many business contracts to contain an “attorneys’ fees” provision. The standard “attorneys’ fees” provision states that, in any litigation involving the contract, the “prevailing party” will be entitled to recover reasonable attorneys’ fees. Courts across the country routinely enforce “attorneys’ fees” provisions. But HOW they enforce them can be complicated and often disappointing. For one thing, “reasonable” is often found by the Courts to be a significant discount to the stated hourly rate. But an often larger problem is that lawsuits tend to be very complicated, involving numerous related and unrelated claims and counter-claims with all sorts of procedural twists and turns, such that it can be difficult to determine, in the end, who is the “prevailing party.” Nevertheless, for any reputable business that honors its contracts, an “attorneys’ fees” provision should be included in most contracts and most certainly in business to business contracts with suppliers and contractors.
Most business litigation attorneys will tell you that one of the first things they look for, when advising a client in a contract dispute, is whether or not there is an attorneys’ fees provision. It changes the economic dynamic of a case, especially where there is a relatively small amount in controversy. If there IS an attorneys’ fees provision, it is typically a strong disincentive for a party to refuse compliance with the contract, even where the contract value alone would not justify the attorneys’ fees involved in pursuing legal action. For example, the breaching party may only owe $5,000 on the contract, but if he will also have to pay for the attorneys’ fees of his opponent, he could easily be facing a $40,000 judgment, creating a stronger motivation to comply.
The experienced and dedicated attorneys at the Gehres Law Group, including our transactional lawyers and the litigation lawyers, understand the importance of liquidated damage and attorneys’ fees provisions. Whether you are about to enter a contract, or are already involved in a dispute over a contract, we can help. Contact us for a free evaluation of your case or browse our website for more information.