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Spring 2016Prevailing party attorneys’ fees clause:Some challengesJ. Kent Holland, J.D. ConstructionRisk, LLCA prevailing party attorneys’fees clause in a contractcan create havoc whentrying to resolve disputesin a reasonable manner—particularly when lookingto professional liabilityinsurance to cover damages.An example of a prevailing party clauseis as follows: “In the event of litigationrelating to the subject matter of thisagreement, the prevailing party shall beentitled to receive from the other partyits reasonable attorneys’ fees and costs.”This contract provision requires the partythat does not prevail in a lawsuit to paythe prevailing party’s legal fees andother costs that have been itemizedin the contract clause, such as expertwitness fees.For the reasons discussed below, thispaper suggests: (1) don’t agree to includeprevailing party clauses in contracts, and(2) if your client absolutely requires one,then at a minimum, (a) limit it to feedisputes; (b) carefully define what itmeans to be the “prevailing party” inorder to remove the uncertainty of howa court or arbitrator might subjectivelydetermine the prevailing party; and (c)cap the recovery of attorneys’ fees atthe amount of the actual compensatorydamages recovered.1

Spring 2016Contractual liability exclusionbars coverage for shiftedattorneys’ fees“Under what is knownas the American Rule,each party to litigationwill bear its own litigationcosts in the absenceof a statutory orcontractual requirement.”Professional liability insurance policies onlycover damages that a design professionalis legally obligated to pay as a result of itsnegligent acts, errors or omissions in theperformance of professional services.All professional liability policies, as far aswe know, include what is known as the“contractual liability” exclusion. Thatexclusion states there is no coveragefor liability that the insured designprofessional assumes under a contractthat it would not have had at common lawfor its negligent acts, errors or omissions.Under what is known as the AmericanRule, each party to litigation will bearits own litigation costs in the absenceof a statutory or contractual requirement.By agreeing to pay the attorneys’ feesof a client that prevails in a claim againstthe insured, the insured has created acontractual liability that is excluded fromcoverage because it is an obligation itwould not otherwise have at commonlaw, but which was created solely byvirtue of the contractual promise.Whether any claim is covered is a decisionmade by the carrier’s claims departmentafter a claim has been made against theinsured. The coverage decision is basedon the application of the law, the policyand the specific facts of the case.It is also important to consider thatbecause professional liability policiesare “claims-made,” the policy in effectwhen the claim is made could very wellbe different and written by a differentinsurance company by the time a claimfor prevailing party fees and costs ismade against the design professional.The coverage decision will be based onthe application of the law, the policy andthe specific facts of the case at the timethe claim is made. Therefore, it will bethe current insurance carrier’s policy andinterpretation of coverage that matters,rather than the company that wrote thepolicy at the time the contract betweenthe design professional and client wasentered into.The old idea that frivolous lawsuits would be discouraged byprevailing party clauses has notpanned outThere was a time when the design andconstruction community (as well as someof their legal and risk managementadvisors) recommended prevailing partyclauses as 1) a way to make plaintiffs thinktwice before filing frivolous lawsuits, and2) as a means to facilitate litigation bydesigners and contractors against theirclients who were arbitrarily refusing topay fees when due.The thinking was that the cost of pursuinglegal action to recover unpaid fees wouldbe so excessive that designers andcontractors would not be able to justifythe legal battle and would have to foregocollecting their fees. The prevailing partyclause was supposed to remedy that byforcing the recalcitrant client to pay theplaintiff’s legal fees in addition to the feesearned under the contract.Unfortunately, there was a problem withthis logic. Anyone who has spent time inthe construction industry knows thatvirtually every time a designer orcontractor sues its client for unpaid fees,there is going to be a countersuit claimingnegligent performance of services andvarious errors, omissions and deficienciesthat caused the client to incur extra projectcosts and damages.2

Spring 2016“Due to the threat of having topay an adverse party’s expensivelegal costs, some contractors anddesign firms are settling disputesfor less than their true value.”A polling of numerous design professionalinsurance carriers reveals that many of theclaims they have paid on behalf of theirinsured design professionals resulted fromcounterclaims brought by clients after thedesigner sued to recover its fee. This hasbecome so prevalent that many carriersconsider designers who sue clients fora fee to be a high risk and include aquestion on the insurance applicationasking whether the designer files suitsagainst its clients to collect fees.The irony is that not only does theprevailing party clause not help thedesigner or contractor to collect its feesthrough litigation; it has actually resultedin adverse settlements because, asdiscussed below, it may be safer to settlefor less than to potentially pay the otherparty’s attorneys’ fees at the end oflengthy and expensive litigation.The prevailing party clausemay be encouraging litigationBased on anecdotal evidence, it appearsthat rather than discouraging litigation,the prevailing party clause may actuallybe encouraging project owners to makeclaims they would have otherwiseforegone based on a cost-benefit ofanalysis of how much they would haveto pay in attorneys’ fees compared tohow much they would potentially recoverfrom the defendant. If, however, theowner can recover its attorneys’ fees,it does not matter that it may ultimatelyget a relatively small compensatorydamage recovery from the defendant.The prevailing party clause can make itworth the gamble for the plaintiff topursue a claim that it might nototherwise have pursued.Prevailing party clause mayadversely impact settlementDue to the threat of having to pay anadverse party’s expensive legal costs,some contractors and design firms aresettling disputes for less than their truevalue. They are finding it is too dangerousto take the risk that their client mightprevail on some small part of theiroverall claim and yet be deemed the“prevailing party” and receive attorneys’fees far exceeding the compensatorydamages awarded.This has a chilling effect on seeinglitigation or arbitration through to afinal determination, even if it is predictedthat the defendant would be able tosuccessfully defend against the biggestpart of the claims. The problem is thatif the defendant successfully defendsagainst 80% of the claim, so that theplaintiff only prevails on 20% of its claim,that plaintiff could still be deemed the“prevailing party” and be entitled to itsattorneys’ fees pursuant to the prevailingparty clause. How courts interpret theprevailing party clause varies widelyfrom state to state.From my own recent experience indefending claims against designprofessionals by contractors (one in courtand one in arbitration), the prevailing partyattorneys’ fees provision caused the designfirm to make a risk management decisionto settle the cases for more than theywould likely have paid if the matters wentto final judgment. This is because even asmall judgment might have resulted inhaving to pay exorbitant attorneys’ feesto the contractor as the “prevailing party.”In those cases, the prevailing partyclause could be said to have encouragedthe filing of claims against the designprofessional and then have caused thedesign professional to pay settlementamounts it felt were unjustified.It is examples like this that are causingsome insurance carriers to advise theirdesign professional insureds to strikeout the prevailing party attorneys’ feesclause in contracts when negotiatingthe contract terms and conditions.3

Spring 2016What costs are to be awardedto the prevailing party?“Courts look to whether‘substantial relief’ wasawarded and not necessarilywhat percentage of recoverythe plaintiff was awarded ascompared to its overall claim.”To avoid uncertainty concerning whatcosts are intended to be reimbursed tothe prevailing party, it is advisable that adetailed description or listing of the costbe included in the clause. For example,rather than stating that the prevailingparty will be entitled to recover“reasonable attorneys’ fees and courtcosts,” it would be better to describein greater detail the costs and expensesintended to be covered. For example,confusion could be avoided by statingthat the prevailing party will be entitledto recover “any and all costs and expensesincurred with respect to such litigationor other proceeding, including withoutlimitation, reasonable attorneys’ fees,court costs, other disbursements andcosts and expert fees and costs.”1If the clause does not specifically statethat it includes expert fees as part of therecoverable cost, it is quite possible thecourt will not allow them. In the caseof Specialty Retailers Inc. v. Main StreetNA Parkade, LLC (Massachusetts 2012),a court found that expert fees were notrecoverable under a prevailing party clausethat only entitled recovery of “reasonableattorneys’ fees and court cost” because,in the court’s opinion, expert fees do notequate to court costs. This demonstratesthe importance of being clear with regardto your intent when drafting prevailingparty clauses.Who is the prevailing party?According to Black’s Law Dictionary,the prevailing party is “a party in whosefavor a judgment is rendered, regardlessof the amount of damages awarded.”2The United States Supreme Court hasstated, “Plaintiffs may be considered‘prevailing parties’ for attorneys’ feespurposes if they succeed on any significantissue in litigation which achieves some ofthe benefit the parties sought in bringingsuit.”3 Federal Rules of Civil Procedure,Rule 54 (d)(1) provides that even in theabsence of a prevailing party clause, the“prevailing party in federal litigation isentitled to recover costs other thanattorneys’ fees.” As a result of this rule,at the conclusion of a case, federal judgesmust make a determination of who is the“prevailing party” in order to award “courtcosts.” For purposes of rule 54 (d), a partyis deemed a prevailing party if the courtawards it “substantial relief.” See Smartv. Local 702 International Brotherhood ofElectrical Workers.4A party that obtains “substantial relief”is deemed the prevailing party in federallitigation “even if it does not win onevery claim.” (Slane v. Mariah Boats, Inc.)5An excellent example of this is seen inthe case of Summerfield v. City ofChicago6, where a jury awarded a plaintiff 30,000 on two counts of a complaint,found against him on a third count andthe judge earlier dismissed two othercounts by summary judgment.This decision is instructive as to howcourts can be expected to determinewho is a prevailing party in general.Courts look to whether “substantial relief”was awarded and not necessarily whatpercentage of recovery the plaintiff wasawarded as compared to its overall claim.Thus, even if a defendant is successful indefeating most of a plaintiff’s claim, as inSummerfield, a small recovery by thatplaintiff might be sufficient for the courtto find they obtained “substantial relief”and are entitled to recover all or somesignificant portion of their attorneys’ fees.4