The Three Most Important Contract Term Considerations for Breach of Contract Lawsuits

So, what are they?

1. Recovery of Attorney Fees and Expenses: Does the Agreement have a clause giving the winning party in a lawsuit the right to recover their attorney fees and costs from the other party?  Many businesses are unaware that most civil lawsuits do not entitle the winning party to recover attorney fees and costs from the other party.  Unless there is a specific statute granting attorney fees (like in some employment cases), then attorney fees are generally not recoverable and won’t be awarded with the judgment. In almost all commercial cases, this is a significant financial issue that must be evaluated prior to filing suit. Simply, lawsuits are expensive. If attorney fees and costs aren’t recoverable, the business needs to take a hard look at a costs/benefit analysis to determine how much it will cost to bring the lawsuit vs. how much can be recovered in actual damages.

So, what are some of the typical costs involved in filing a business lawsuit? Costs include filing fees for initiating the suit and filing fees throughout the duration of the lawsuit, service of process on opposing parties, depositions, transcripts, expert reports, expert witness time, documents, demonstratives and exhibits, and attorney and staff trial preparation time. In the business context, these costs can be further amplified with additional depositions, multiple experts, more detailed discovery, counterclaims, delays, motions, and multi-day and even multi-week trials. Many business cases cost six figures to take through trial.  All of these items add up rapidly and not being able to recover them from the other side could be the deciding factor on whether to pursue litigation.

In order to protect your business from losing these costs in the pursuit of a legal judgment, it’s important to consider a contract clause that ensures the ability to recover these amounts. This type of clause is often called a “prevailing party clause” and can look something like this:

Recovery of Fees, Costs and Expenses  In the event of a dispute, claim, hearing, arbitration or legal proceeding with respect to this Agreement in general, or the rights, obligations, and violations of either party hereunder, the prevailing party in any such action shall be entitled to recover its costs, expenses and reasonable attorneys’ fees from the non-prevailing party.

Are there reasons why you might not want an attorney clause provision? You may decide against one of these types of clauses if perhaps there is a greater risk that you will be the party that breaches. In that case, you may not want the added risk of paying attorney fees in a dispute if you lose. It’s not a one size fits all decision, but it is one that should be considered.

2.Venue: Venue refers to the location where a lawsuit will be filed. Many contracts involve companies based in different locations, with work being done across multiple states. A party can call out the location for lawsuits with a well-drafted venue clause. This is an important consideration. Some states are more business-friendly in their laws. Also, from a cost and convenience factor, it’s normally best to bring lawsuits in your home state. Colorado, for example, has generally excellent, well-established business and corporate laws. While cases may end up in Federal (instead of state) court if they involve parties from different states, the contract can still require that all suits (federal or state) be brought in a specific location.  This has impacts throughout the lawsuit, including locations for court hearings, mediations, some depositions, etc. Picking your home turf for a lawsuit can minimize some of the time and cost burdens on staff and make it more expensive for your out of state opponent.

Other factors to consider when determining whether to include this type of clause in your contracts include the cost of hiring local attorneys (if the chosen venue is out-of-state for you), costs associated with travel for depositions, mediation, or other conferences where your presence is mandatory, hiring local experts, process servers and investigators, travel costs for and availability of witnesses, and time. These are only a few of the factors to consider. You could be looking at a significant increases in costs, efforts and time depending on the venue where your dispute will be litigated.

A venue clause may look something like this:

Venue:  In the event of a breach or a threatened breach of any covenant contained herein, the parties each consent and hereby submit themselves to the exclusive jurisdiction of the courts located in the City and County of Denver, State of Colorado, and acknowledges that venue shall be proper in said court in order to seek a restraining order and/or injunction restraining the breach or threatened breach of any covenant contained herein or any order of mandatory compliance with the terms of this Agreement.

3. Choice of Law: This matter ties in directly with choice of venue. From a practical standpoint, it makes very little sense to pick a location and not also consider and call out the choice of law that will apply. This means carefully considering which state’s laws will apply to your lawsuit.  If you choose another state’s laws, it may not actually be enforced in another state. Similarly, the one state’s courts will not be familiar with another state’s laws. Also, it’s likely that your business operations will have been generally tailored to meet the laws of your home state. Having another state’s laws govern your contract opens your business up to pitfalls to which you may have otherwise been unaware.

A Choice of Law clause example is below:

Choice of Law: The substantive laws of the state of Colorado (and not its conflicts of law principles) govern all matters arising out of, or relating to, this Agreement and all of the transactions it contemplates, including without limitation its validity, interpretation, construction, performance and enforcement (whether arising before or after termination of this Agreement).