Prevailing Party Clauses in Contracts Explained
What Is a Prevailing Party?
A "prevailing party" clause states that whoever wins a legal dispute arising from the contract can recover their attorney's fees and court costs from the losing side. Without this clause, each party typically pays their own legal expenses regardless of the outcome — a principle known as the "American Rule."
How It Works in Practice
When a contract includes a prevailing party provision, the court decides which side "prevailed" after the dispute concludes. This determination is not always straightforward:
- If one party wins on all claims, they are clearly the prevailing party
- If both sides win on some issues and lose on others, courts may look at the "net" outcome
- Some contracts define prevailing party more specifically — for example, requiring recovery of a certain percentage of the claimed amount
Why It Matters
Prevailing party clauses change the economics of litigation significantly. They can:
- Discourage frivolous lawsuits — a party with a weak case risks paying both sides' legal bills
- Encourage settlement — the risk of paying the other side's fees pushes parties toward resolution
- Create asymmetric risk — if one party has deeper pockets, the clause may disproportionately deter the smaller party from pursuing legitimate claims
Red Flags to Watch For
- One-sided prevailing party clauses that only allow one party to recover fees
- Vague definitions of what "prevailing" means
- Clauses that include recovery of fees for informal disputes, not just court actions
When to Consult a Lawyer
Consider speaking with an attorney if your contract includes a prevailing party clause and you are entering a high-value agreement, or if you are contemplating litigation and need to understand your potential fee exposure.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.