When the term “prevailing party” is not carefully defined, it can lead to a result where your company or client is left without the possibility of recovering attorney’s fees or having to pay the other side’s attorney’s fees. The term “prevailing party” is typically defined in the context of the overall contract with the goal of permitting the recovery attorney’s fees in the event of a dispute.
For example, if the prevailing party is narrowly defined in the contract as one that is found to have overpaid in a dispute regarding a sale and your company is the seller, an opportunity would have been missed for recovery of attorney’s fees by the seller when it prevails in such a dispute. Ensuring your company or client’s ability to recover attorney’s fees is highly important when litigation ensues and fortunately can be easily addressed with clear drafting at the transaction phase.
One simple approach is to ensure that the prevailing party definition includes parallel language providing both parties with an avenue to recover attorney’s fees if they prevail in the dispute. For example, in a contract related to the sale of a business in the energy industry, defining the term “prevailing party” to include both overpayment and underpayment would ensure the ability of both parties to seek and potentially recover attorney’s fees. Another approach is to define the term “prevailing party” with more general terms tied to the party a judgment is entered in favor of rather than using narrow terms such as “underpaid” or “overpaid,” which may preclude recovery.
When business terms are used to define who the “prevailing party” is, carefully framing what percentage would trigger the recovery for attorney’s fees in the definition section of the contract can be invaluable. Complex commercial deals that include multiple payments and define the prevailing party as the party that has been underpaid or overpaid by 10%, for example, could unintentionally allow one party to be deemed a prevailing party based on one provision or payment when that was not the intended result.
While drafting an unambiguous and favorable prevailing party clause may not be top of mind when payment terms and service terms are being heavily negotiated, clearly defining the term “prevailing party” to ensure your client or company is able to recover attorney’s fees when litigation ensues is critically important.
Authored by litigators from our energy team, the Not Just Boilerplate series on Power & Pipes provides real-world examples of the impact that certain contract clauses can have on energy companies. Whether in repeat form agreements, employment agreements, or heavily negotiated one-off deals or mergers, there can sometimes be a tendency to just “grab” clauses from prior agreements, with the thinking that “it has always worked before . . .”
Our energy lawyers have experience with a wide array of litigation matters that have turned on various common contract clauses, some of which may have not received much attention at the time they were included in the agreement. We thought it might be useful to pass on some real-world “lessons learned” from the litigators who have actually fought the battles. Such perspectives might help to inform your next contract—or dispute.