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Often the American Rule Sucks

American-RuleClarksville, 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.

It is all well and good to sue someone to try to collect a debt; but from the very beginning of every business relationship, you have to consider the possibility that they may not pay you, and you have to plan for that eventuality. From the beginning of your formal business relationship, you should already be considering the cost of an attorney in a potential collections case. I’m not saying you shouldn’t try to trust people; I’m just saying you should not trust them blindly!

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.

Noel R. Bagwell, III, Esq.
Noel R. Bagwell, III, Esq.http://www.ExecutiveLP.com/
Noel R. Bagwell, III, Esq. is an attorney and the founder of ExecutiveLP® a business law firm for start-ups and small-to-medium businesses (SMBs). Noel is also the National Center of Preventive Law's Leader for Start-Ups and Small Businesses. A graduate of Cumberland School of Law at Samford University in Birmingham, AL, Noel distinguished himself by earning the 2010 Scholar of Merit award for his academic performance in Economic Analysis of Law. He has since won multiple awards for pro bono legal service, much of which has been provided to veteran entrepreneurs in Middle Tennessee and beyond. He also has extensive experience as a public speaker and Continuing Legal Education (CLE) instructor.  NOTICE: The opinions and ideas expressed in this article are solely the opinions of the author, and may not necessarily reflect the views of the website on which they have been published. Nothing in this article should be construed to be “legal advice.” No attorney-client relationship results from the consumption of this media material. Please contact an attorney if you need legal counsel. This article was written by Noel Bagwell for ClarksvilleOnline.com, and is intended only to inform the general public of the author’s opinion. The opinions expressed in this article are those of the author, and not of any government agency, company, corporation, or individual.

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