Contracts are relevant documentation that sets expectations and lays out agreed-upon terms between the parties involved. Some business owners and managers that are not legal professionals, like the idea of drafting their own contracts. From a professional perspective, we encourage the practice of consulting attorneys when creating a contract, especially when the transactions involve money. Lawyers offer an outside perspective and they are trained to identify the weaknesses in written agreements.
We have encountered multiple instances that a company unknowingly placed itself in a regrettable situation after including phrases that they have seen in online templates but did not completely understand. We call these phrases “ticking time bombs” because it only takes time until the other party notices the loophole and comes after you.
One of the most common that we see is the “prevailing party” phrase. The prevailing party refers to the winner in a lawsuit. The inclusion of this clause in a contract means that the losing party will pay for the legal fees and expenses of the winning side. This clause is often looked at as a double-edged sword but, as we see it, it does more harm than good.
The advantage of including a prevailing party clause, also known as the attorney’s fee clause, is if you win, your legal fees will be covered aside from damages, but this positive note is easily outweighed by the disadvantages.
Using a prevailing party clause in your contracts is an open invitation to your client to sue you with the assumption that the court will side in your favor. In cases where conflicts can be solved reasonably yet a prevailing party phrase was used, you are encouraging your client to actively seek flaws and take the matters to court. If the situation turns out in a way that you did not expect, you are at risk of paying the other party’s legal fees.
What phrase can be used instead?
First of all, the wordings in a contract depend on the transaction and the situation, but if you want the coverage that the prevailing party provides without its disadvantages, you may state the following:
“If invoices are not paid and help is needed, the client will pay the collection and attorney’s fees and related costs.”
The prevailing party clause is used to discourage frivolous lawsuits but cases might take an unexpected turn and the phrase that you expect to serve as your protection will expose you to paying the other party’s legal fees. As a preventive measure, always consult an attorney before getting your contracts signed.
Adams, Evens, and Ross has been in business with staffing and recruiting companies in the past 30 years as the leading past-due staffing and recruiting debt collectors. We are one of the few collection firms large enough to have staff attorneys along with seasoned collectors, asset investigators, and world-class support staff. AER is the only collection firm in the world that is endorsed by 5 funding companies, 14 associations, and 10 recruiting and staffing trade magazines.