How to Collect – Make Sure Your Contract Includes an Attorney Fee Provision

In California, the general rule is that each party to a lawsuit bears its own attorney fees.  So if your contract is silent as to attorneys’ fees, and if you are forced to engage an attorney to collect from a customer, you generally must pay your own attorney – in other words, you cannot add your attorney fees to the amount owed by the customer.

But this problem is easily solved.  Simply add a “prevailing party” provision to your contracts.  A standard prevailing party provision looks like this:

“If any party to this contract institutes a legal or equitable action or arbitration proceeding in connection with any dispute or matter arising hereunder, the prevailing party shall be entitled to recover its reasonable attorneys’ fees and costs reasonably related to litigation or arbitration.”

Note:  Business owners are often tempted to include a “one-way” attorney fee provision (i.e., a provision which allows the business to recover attorney fees, but not the customer).  But such one-way provisions are automatically deemed two-way provisions pursuant to Civil Code § 1717.

A well-drafted “prevailing party” provision can greatly increase your collection chances, as well as the amount you collect.  Your initial demand letter to debtors can explain that the debtors’ liability will increase significantly if legal action becomes necessary.  People are aware that attorneys are expensive.  People generally act quickly to prevent creditors from engaging attorneys.  When the creditor has already engaged an attorney, debtors often act quickly to put the matter to rest.

An attorney fee provision is also quite helpful when drawn out litigation is necessary.  As the case progresses and both sides incur attorney fees, the incentive to settle increases because both sides have more to lose.  In collection matters, anything that pushes the case towards a quicker resolution is generally good.

Long story short, unless your business is sued often, it is wise to include a “prevailing party” / “attorneys’ fees” provision in your contracts.  If you’d like us to review and revise your contracts, please feel free to contact us.

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