Message: Re clause saying parties will bear their own costs, expenses and attorneys' fee
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Jan 01, 2015 06:19PM
The attorneys fees clause is a trap for design professionals; i.e., it encourages owners to sue, and it is uninsurable under the typical E&O [errors and omissions] policy. The American Rule is that parties bear their own attorneys fees in litigation. Attorneys fees clauses in professional services contracts are not at all typical, and they tend to promote litigation when the proper thing for the parties to do is to work out their difficulties, whatever they may be, through informal discussion or mediation, i.e., methods where attorneys are not involved.
A “prevailing party” contract clause is a provision that requires the losing par- ty of a lawsuit, claim or other litigation to pay the legal expenses incurred by the prevailing party, including attorney fees. In the absence of such a contrac- tual stipulation, each party typically bears responsibility for its own legal costs.
Prevailing party clauses were especially attractive to design firms who may be forced to sue a client for nonpayment of fees. The prospect of spending thou- sands of dollars in legal costs in an attempt to collect fees for services without the possibility of recovering those legal costs has caused many firms to throw up their hands, forget about recovering the fees and chalk the loss up to ex- perience. With a prevailing party clause, a design firm is more apt to keep its resolve and fight for the fees for services it deserves.
Why You Should Think Twice
Recently design professionals and their advisors have begun to think twice as to whether prevailing party clauses are, in fact, in their best interest. First, there is the fact that if a court or other trier of fact finds you negligent as alleged, you have to pay the other party’s legal expenses in addition to the damages you caused. Making matters worse, this voluntary contractual assumption of liability for the other party’s legal defense costs may not be covered by your professional liability policy! The money may come right out of your pocket.
Put simply, professional liability insurance covers your legal liability arising out of your negligent acts, errors or omissions. However, it does not generally cover contractual assumptions of liability unless you would be legally liable for the negligence, error or omission in absence of the contract clause. Since you would not normally be liable for another party's legal expenses in absence of a prevailing party contract stipulation, chances are those costs are not covered by your insurance unless specifi- cally stipulated in your policy.
A growing number of insurers, however, see the clause as a double-edged sword and hedge their support of usage. They say they have had situations in which a prevailing party clause has been used to an insured’s advantage, but warn that it can also result in significant costs should a plaintiff prevail against a design firm. They say a clause may or may not be covered by their professional lia- bility insurance policy, depending on the specific language of the provision and the circumstances of the situation.
Interestingly, attorneys who represent design firms are also split on the value of the prevailing party clause. Attorneys in favor of the clause say they recommend them because they discourage frivo- lous claims. More specifically, these attorneys say that without a prevailing party clause, a design firm typically cannot afford to pursue fee claims.
Attorneys opposed to the provision state they may be a trap for design professionals, actually en- couraging owners to sue if they think they have a strong case. This is particularly true, they say, for large clients who can extend a substantial (and expensive) effort to win their lawsuit. Plus, these at- torneys recognize that prevailing party legal expenses are uninsurable under a growing number of professional liability policies.
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Jan 01, 2015 07:12PM
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Jan 01, 2015 08:22PM
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