Many design and construction industry contracts include a clause in the disputes provisions stating that the “prevailing party” shall be entitled to recover its attorney’s fees and legal expenses from the other party, because they won the case or other legal action. In other words, a prevailing party in a dispute is the party who wins the majority of contested issues, obtains a favorable judgment, or achieves a net monetary recovery, making them eligible to recover legal costs and fees from the losing party.
A Typical Party Clause
A prevailing party clause includes language such as:
In the event of any litigation arising from breach of this agreement, or the services provided under this agreement, the prevailing party shall be entitled to recover from the non-prevailing party all reasonable costs incurred including staff time, court costs, attorneys fees, and all other related expenses incurred in such litigation.
However, a prevailing party clause only applies to binding legal proceedings including arbitration and litigation. It does not apply to non-binding dispute resolution proceedings including, but not limited to, mediation and negotiation in which a settlement or offer is arrived at outside a legal proceeding.
The American Rule
These clauses alter the standard where both sides pay their own legal expenses. In the U.S., attorneys' fees are not generally awardable to the prevailing party in litigation unless the litigant acted in bad faith, or the award of attorneys' fees is contractually agreed to.
Historically, many in the insurance industry and the legal profession recommended that mutual prevailing party clauses be included in design professional contracts. The logic was that such clauses make a client of an architect or engineer think twice before bringing a frivolous or otherwise questionable claim against a design firm. The prospect of paying the defendant’s legal bills in the event the plaintiff does not prevail makes a prospective plaintiff reconsider filing a lawsuit. None the less, the professional liability insurance industry remains divided on its opinion regarding the use of prevailing party clauses, for design professionals.
Prevailing party clauses were especially attractive from a design firm’s perspective when forced to sue a client for nonpayment of fees. However, the prospect of spending thousands of dollars on legal fees to collect receivables, without the possibility of recovering legal costs, caused many firms to throw up their hands, and forget about recovering the fees and chalk the loss up to experience. With a prevailing party clause, a design firm is more apt to keep its resolve and fight for the fees it deserves.
Considerations When These Causes are Used
The problem with prevailing party clauses is many-fold. Of utmost importance is the fact that professional liability policies do not cover attorney’s fees that an insured design professional is required to pay (only as the result of a contractual liability clause), such as the prevailing party attorney’s fees clause. A professional liability policy contains coverage exclusions for liabilities assumed by contract that would not exist in the absence of the contract.
The second problem is that the term “prevailing party” is undefined and ambiguous in its meaning. Courts can interpret it to mean anything they deem appropriate. It is even possible for a party to recover less than 10 percent of its claim and be awarded 100 percent of its attorney’s fees as the “prevailing party.”
Another point is that in multiple party design and construction disputes/cases, many times liabilities are distributed to more than one entity. Larger disputes may likely include architects, engineers, design consultants, construction contractors and subcontractors, construction managers, special consultants such as estimators, landscape architects, interior designers, etc. Thus, there could no clear cut “prevailing” party, and a judge could have a difficult time sorting the situation out of who is what. Since the vast majority of construction cases are settled through mediation, all parties likely will contribute to cover the loss. If that is the case, no one wins (prevails), since everyone shares the loss. Prevailing party clauses are simply not suited for larger cases.
Since the prevailing party attorney’s fees clause may create uninsurable losses, the preferred course of action is to strike this clause from design professional contracts. But if the project owner refuses to strike it, and a design professional is willing to assume the risk of these uninsurable attorney’s fees, then at a minimum, the term “prevailing party” needs to be carefully defined.
At Least Define What Prevailing Means
In order to avoid confusion, never agree to a prevailing party’s attorney’s fee unless you add a definition such as the one below. Note that there are numerous ways to draft a definition and different percentages can be used at the option of the parties.
Prevailing Party is the party who recovers at least 67% (two-thirds) of its total claim in the action, or who is required to pay no more than 33% of the other party’s total claims in the action when considered in the totality of claims and counterclaims, if any. In claims for monetary damages, the total amount of recoverable attorney’s fees and costs shall not exceed the net monetary award of the Prevailing Party.
Conclusion
A party does not need to win on every single claim to be considered the prevailing party, but they generally cannot recover fees for specific, separate issues they lost. Courts often look at who won on the "most significant issue" rather than just the total number of claims. The bottom line is that it is a business decision on a person’s part as to what your risk tolerance is when agreeing or not to a prevailing party clause. There are many pros and cons regarding this legal provision.
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About the Author of this Risk Management Building Block Article
As a risk manager for the last 20 years for the design profession, Eric O. Pempus, FAIA, Esq., NCARB has experience in professional liability insurance and claims, architecture, engineering, land use, law, and a unique background in the construction industry. Prior to risk management, he has 25 years of experience in the practice of architecture/engineering, and as an adjunct professor teaching professional practice courses at the undergraduate and graduate levels for 37 years at Kent State University’s College of Architecture & Environmental Design.
As a Fellow of the American Institute of Architects and AIA National Ethics Council 2021 Chair, he has demonstrated his impact on architectural profession. He has presented numerous loss prevention and continuing educational programs to design professionals since 2000 on topics of ethics, contracts, and professional practice in various venues across the United States and Canada. He is a former member and chair of his city’s Board of Zoning & Building Appeals for 24 years, and is a licensed architect, attorney, and property & casualty insurance professional.
His educational background includes a JD from Southwestern University School of Law, Los Angeles; Master of Science in Architecture from University of Cincinnati; and BA in psychology/architecture from Miami University, Oxford, Ohio.
The above comments are based upon DesignPro Insurance Group’s experience with Risk Management Loss Prevention activities and should not be construed to represent a determination of legal issues but are offered for general guidance with respect to your own risk management and loss prevention. The above comments do not replace your need for you to rely on your counsel for advice and a legal review, since every project and circumstance differs from every other set of facts.
Disclaimer: The viewpoints expressed in this article are those of the author(s) and are not necessarily approved by, reflective of or edited by other individuals, groups, or institutions and this article is an expression by the author to generate discussion and interest in this topic.