Why You Do Not Want the “Prevailing Party” Clause in Your Agreements from a Collection Standpoint

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.