A recent Missouri court case has prompted me to revisit attorneys’ fees provisions in contracts I draft and negotiate. The case, Midland Property Partners, LLC v. Watkins, doesn’t break any new ground, but it reminded me how important the language can be.
Even before reading Midland Property, I’d had attorneys’ fees provisions on my mind. Under the “American Rule,” which is followed by courts in Missouri and most of the rest of the U.S., the parties to breach of contract suits have to pay their own attorneys’ fees — even when they win the case. As a practical matter, this means that it’s often uneconomical for a party to enforce its contract because it’ll still have to foot the bill for its lawyers. I’ve advised a number of clients who’ve had to make the decision to sue or not to sue, and the inability to recover enforcement costs really affects the calculus.
The American Rule can be overridden by inserting a contract clause that entitles a party to recover its enforcement costs, including attorneys’ fees. Such clauses can be one-sided (giving the right to one party but not the other) or mutual (generally giving the prevailing party the right to recover expenses from the non-prevailing party). Some factors to consider in deciding whether to include an attorneys’ fees provision, and whether it should be one-sided or mutual, include the relative financial wherewithal of the parties, the likely relative costs between the parties of enforcing the contract, whether you’re more likely than the other party to breach the agreement, and whether it’s the sort of contract you’d go to court over in the first place.
As the Midland Property case cautions, once you’ve decided to include an attorneys’ fees clause in a contract, you have to be clear about what it covers. The clause in Midland Property, which was contained in several promissory notes, provided that Watkins must pay “all reasonable costs incurred by [Midland Property] in collecting or enforcing payment” of the notes.
This sounds broad enough to cover all of Midland Property’s out-of-pocket litigation and enforcement expenses. But the Missouri Court of Appeals, Western District held that the clause was not sufficiently explicit to cover attorneys’ fees, citing Missouri precedent holding that “costs” and “expenses” do not include attorneys’ fees. The court concluded:
Thus … Missouri courts, in accordance with the American rule, have favored the award of attorneys’ fees only where a contract expressly authorizes their recovery. Here, the Notes provide merely that Appellant must pay “all reasonable costs incurred by the [Respondents] in collecting or enforcing payment [of the Notes].” Such language does not expressly authorize the recovery of attorneys’ fees in addition to the other ordinarily recoverable statutory costs. The Notes, therefore, do not contain a provision that would expressly permit Respondents to recover attorneys’ fees.
Clearly, in Missouri at least, you must be crystal clear in your contract that you want a party to be entitled to recover its attorneys’ fees.
Richard Green of Thompson & Knight LLP, in section 12.02 of Negotiating and Drafting Contract Boilerplate (Tina Stark, ed.), has a brief and helpful discussion of the differences between fees, costs, and expenses (and how they’re often synonymous). In addition, Ken Adams discusses the meanings of “costs” and “expenses” in section 13.128 through 13.130 in the third edition of A Manual of Style for Contract Drafting. Ken suggests referring to “court costs, other litigation costs, and any other expenses” as a possible alternative to the generic and less-helpful “costs and expenses.”
Ken’s suggestion generally covers the territory well, but I agree with Jill Johnson of the St. Louis law firm Thompson Coburn who wrote a blog article about Midland Property titled Want to recover attorneys’ fees in Missouri? Make sure you use the magic words.
[I revised the post on 1/3/2014 to correct attribution of the cite to Negotiating and Drafting Contract Boilerplate.]