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Contract Negotiation Tip of the month:  Avoid including prevailing party clauses in contracts.  But if your contract must include one, be sure to define the term “prevailing party.”

Many contracts include a clause in the disputes provision of the agreement stating that the “prevailing party” shall be entitled to recover its attorneys fees from the other party. The problem is twofold.  Of utmost importance is the fact that professional liability policies do not cover attorneys fees that an insured design professional is required to pay only as the result of a contractual liability clause such as the prevailing party attorneys fees clause.

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 attorneys fees as the “prevailing party.”
Since the prevailing party attorneys 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 the design professional is willing to assume the risk of these uninsurable attorneys fees, then at a minimum, the term “prevailing party” needs to be carefully defined.
In order to avoid confusion, never agree to a prevailing parties attorneys fee unless you add a definition such as the 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.
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Here is an example definition:

“Prevailing party” shall be defined (1) as a claimant that is awarded net 51 percent of its affirmative claim, after any offsets for claims or counterclaims by the other party, and (2) as a defendant/respondent against whom a net award of 50 percent or less of a claimant’s claim is granted. In claims for money damages, the total amount of recoverable attorney’s fees and costs shall not exceed the net monetary award of the Prevailing Party.
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This article is published in ConstructionRisk.com Report, Vol. 18, No. 4 (April 2016).

Copyright 2016, ConstructionRisk, LLC