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Whether to Include an Attorney’s Fees Provision in Contracts

October 19, 2016, on Articles by

Deciding whether to include an attorney’s fees provision in a contract is not easy.

In 2014, the California Court of Appeal in San Francisco held in Syers Props. III, Inc. v. Rankin, 226 Cal. App. 4th 691 (2014), that a “reasonable” attorney’s fees provision in an agreement does not limit the amount of the legal fees to that which the winner actually incurred or even agreed to pay to his lawyers, but in fact could be much higher. In Syers, the court held that the reasonable attorney’s fees hourly rate was almost double the amount that was suggested as having actually been paid to counsel who was paid at a much lower rate by the insurance company, pursuant to an errors and omission policy. The court arrived at the much higher rate as the reasonable rate, based on its analysis of what the hourly rate was that prevailed in the “relevant market.”

It appears that the Syers court either used the prevailing hourly rates generally paid by clients other than significant users of legal services who are often able to negotiate lower rates (e.g., insurance companies), or it basically concluded that if the lawyers on the winning side were paid a below-market rate, the deal that they negotiated for themselves did not inure to the benefit of the losing party when it was required to reimburse the winner’s legal fees. If either situation was the case, neither approach is necessarily “reasonable.” In determining the prevailing rate in the relevant market, the analysis should include all rates, including “below market” rates paid by significant users of legal services as well as the rate negotiated between the winning party and its lawyers, provided that rate is not zero. A complete analysis of the relevant market rate should include all rates paid in the market.

Since it was issued, the Syers decision has been followed by other courts (see, e.g., Calvo Fisher & Jacob LLP v. Lujan, 234 Cal. App. 4th 608 (2015)), including at least one of the federal courts sitting in California. The take away is that, when considering whether to include an attorney’s fees provision in your contracts, you might want to give it more than just passing consideration. What you pay your lawyers may not be a good yardstick for assessing the risk of having to pay the other side’s legal fees if you are not successful. One possible option is to include in the attorney’s provision language that the reasonable fees recoverable cannot exceed the actual fees paid or agreed to be paid to counsel. There is no guarantee that this provision would be enforced by a court, but it would provide an argument that could be raised if the other side seeks to recover twice what it had actually paid.