Clarksville, TN – I’m as patriotic as the next guy, but, let’s face it, Americans don’t do everything the best way possible all the time.
One thing we have not done particularly well, in my opinion, is establish an efficient default rule for who should pay attorneys’ fees in the event of a lawsuit.
In my opinion, this is particularly true with respect to breach of contract cases.“In the United States, the general rule (called the American Rule) is that each party pays only their own attorney’s fees, regardless of whether they win or lose. This allows people to bring cases and lawsuits without the fear of incurring excessive costs if they lose the case. In contrast, in England and other countries, the losing side is often required to pay the other side’s attorney’s fees after losing a trial.” (More Info: http://bit.ly/AksLKH)
Fortunately, there are a few exceptions to the American Rule.
“One of the most common exceptions to the American Rule involves contracts containing provisions expressly allowing the prevailing party to recover its reasonable attorney’s fees incurred to enforce the contract. Pullman Standard, Inc. v. Abex Corp., 693 S.W.2d 336, 338 (Tenn. 1985); Pinney v. Tarpley, 686 S.W.2d 574, 581 (Tenn.Ct.App. 1984). Thus, parties who have prevailed in litigation to enforce contract rights are entitled to recover their reasonable attorney’s fees once they demonstrate that the contract upon which their claims are based contains a provision entitling the prevailing party to its attorney’s fees.” Hosier v. Crye-Leike Commercial, Inc., 2001 WL 799740 (Tenn.Ct.App. 2001).
If you are concerned about the cost of collecting on bad debts or unpaid invoices, make sure you have considered including in your contracts between your business and your clients or customers an exception to the American Rule. I often find it useful to add to contracts I draft a clause or provision similar to the following:
“In the event [Customer] shall default on any obligation under this agreement [or contract], including, but not limited to, the obligation to pay any invoice as agreed, [Your Legal Business Name Here] shall be entitled to recover as liquidated damages from [Customer] the principal debt or balance owed, plus pre-judgment interest in the amount of [your jurisdiction’s post-judgment interest statutory limit; e.g. 5.25 percent], plus reasonable attorneys’ fees, all court costs, and all expenses reasonably related to the collection of all monies properly due and payable by [Customer] to [Your Legal Business Name Here] under the terms of this agreement [or contract].”
Of course, this kind of contract language can be modified as needed, and may be void where prohibited, not available in all jurisdictions, etc., etc. In other words, this is a blog post on the internet, and you should treat it as such, because your mileage may vary.
You don’t want to end up in a situation where you feel like it’s not worth it to sue someone on a bad debt for $1,000.00 or less because it’s going to cost you at least as much as you might actually collect to pay court costs, filing fees, fees for service of process, and to hire an attorney to collect the debt.
In my opinion, the best way to plan for that is to give your customer an additional incentive not to breach the contract between you and them by making them responsible for your attorney’s fees (and pre-judgment interest, and court costs, and the costs related to collections, including service of process, etc., etc.) if they breach the contract. Incentives matter.
Personally, I think it’s time we altogether put an end to the American Rule. I believe that a “loser pays” system would reduce frivolous litigation and encourage settlement in cases where both parties are roughly equally uncertain about the likely outcome of a trial.
In my opinion, even just ending the American Rule, by default, in breach of contract cases by passing a statute that establishes a “loser pays” system for breach of contract claims would be preferable to the current system.