One of the first questions a business owner asks when contemplating a contract lawsuit is whether they can recover their attorney’s fees if they win. It is a completely rational question: legal fees in commercial litigation can easily exceed the value of the underlying dispute, particularly for small and mid-sized businesses. The answer depends on a combination of what your contract says, what state law applies, and the specific nature of your claim.
The default rule in the United States is what lawyers call the ‘American Rule’: each party bears its own attorney’s fees, regardless of who wins. This stands in contrast to the English Rule followed in many other countries, where the losing party pays the winner’s fees. The American Rule is the baseline, but it has significant exceptions — both statutory and contractual — that frequently apply in commercial disputes. Knowing when those exceptions apply can materially affect both the decision to pursue litigation and the strategy once you’re in it.
For business owners, the attorney’s fees question is not merely academic. A well-drafted fee-shifting clause in your contracts can deter frivolous disputes, give you leverage in negotiations, and ensure that a legitimate win is actually worth the effort. Conversely, signing a contract with a poorly understood fee-shifting provision can expose your business to enormous liability if a dispute goes sideways.
The American Rule and Its Exceptions
The American Rule is the starting point in every US jurisdiction: absent a specific legal basis for fee-shifting, each party pays its own lawyers. This rule promotes access to the courts by ensuring that parties are not deterred from pursuing valid claims out of fear that losing will result in paying the other side’s legal bills. But in the commercial context, this default can create its own problems — it means that winning a breach of contract case for $50,000 may net you far less than that after paying $40,000 in legal fees.
There are two primary pathways to recovering attorney’s fees in commercial contract disputes: contractual fee-shifting provisions and statutory fee-shifting. Some states also allow fee recovery in limited circumstances under common law theories, such as bad faith litigation, but these are narrow exceptions and not something to count on.
Statutory fee-shifting is governed by specific laws that mandate fee awards in certain types of cases. Federal statutes like the Clayton Antitrust Act and RICO allow fee recovery in qualifying cases. State consumer protection statutes — many of which apply to business-to-business transactions depending on how they are structured — often include fee-shifting provisions. Some states have enacted general commercial litigation fee-shifting statutes, though these remain relatively rare. The key is identifying whether any of the statutes relevant to your specific claims include a fee component.
Certain states have enacted statutes that specifically address fee recovery in contract cases. Florida, for example, has a law providing that if a contract contains a one-sided attorney’s fees clause in favor of one party, the court will apply that clause reciprocally so that either party who prevails can recover fees. Texas has its own version of this reciprocity rule as well. California and New York each have their own statutory frameworks that affect when fees are available. If your contracts involve counterparties in multiple states, you need to understand the fee rules in each relevant jurisdiction.
Contractual Fee-Shifting Clauses
The most common basis for attorney’s fee recovery in commercial contract disputes is a contractual provision expressly providing for it. These clauses appear in many forms, and the specific language matters a great deal. A clause that says ‘the prevailing party shall be entitled to recover its reasonable attorney’s fees and costs’ is straightforward fee-shifting. A clause that says ‘in any dispute arising from this agreement, each party shall bear its own legal costs’ expressly excludes fee-shifting. And a clause that says ‘in the event of default, the defaulting party shall pay the non-defaulting party’s reasonable attorney’s fees’ is a one-way provision that only benefits the non-defaulting party.
Courts enforce contractual fee-shifting provisions strictly. The exact language of the clause determines who can recover, under what circumstances, and for what types of proceedings. A clause limited to disputes ‘arising from this agreement’ may not cover claims brought under related tort theories or third-party claims. A clause requiring fees to be ‘reasonable’ invites judicial scrutiny of the hourly rates charged and the number of hours billed. A clause that applies only in the event of ‘litigation’ may or may not cover arbitration, depending on how courts in the applicable jurisdiction interpret that term.
One of the most contested questions in fee-shifting cases is who qualifies as the ‘prevailing party.’ Courts have taken different approaches to this question. In some jurisdictions, the prevailing party is the one who obtains a judgment in their favor, even if the judgment is for less than the amount demanded. In others, courts use a more nuanced analysis that looks at which party achieved its primary litigation objectives. A plaintiff who sues for $500,000 but recovers only $25,000 may or may not be the prevailing party for fee purposes, depending on the jurisdiction and circumstances.
When drafting or reviewing a contract, pay careful attention to the scope of the fee clause. Does it apply only to litigation, or also to arbitration and mediation? Does it cover fees incurred in appeals? Does it include ‘costs’ as well as fees, and if so, what costs are included? Does it apply to claims by either party, or only in the event of a specific type of default? The more precisely these questions are addressed in the contract itself, the less room for dispute when the fee issue actually arises.
What ‘Reasonable’ Attorney’s Fees Means in Practice
When a fee-shifting provision or statute says the winning party can recover ‘reasonable’ attorney’s fees, it invites a separate mini-litigation over the amount of that award. Courts do not simply accept the prevailing party’s billing statements and cut a check. Instead, the prevailing party must file a motion for attorney’s fees supported by detailed billing records, and the losing party can object to specific charges as unreasonable, redundant, or unrelated to the claims that were covered by the fee clause.
Courts typically begin with the lodestar calculation: the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate for attorneys of similar skill and experience in that market. From there, the court may adjust the lodestar upward or downward based on factors like the complexity of the case, the results obtained, the difficulty of the legal issues, and whether the prevailing party succeeded on all of its claims or only some of them. Partial success often results in a reduced fee award.
The hourly rates of your attorneys, the number of hours they spent, and the extent to which the time was reasonably necessary to the prosecution of your claims all become relevant and often disputed. Defense counsel will scrutinize billing entries looking for block billing, excessive time for routine tasks, duplicative work by multiple attorneys, and time spent on claims that were ultimately unsuccessful. In complex commercial litigation, fee disputes can themselves be substantial proceedings.
Keeping your billing records well-organized from the start of a dispute is therefore important for two reasons: it helps you manage your own costs, and it makes your fee petition stronger at the end of the case. Vague billing descriptions like ‘review file’ or ‘case strategy’ are vulnerable to challenge. Specific, task-oriented entries that tie attorney time to identifiable phases of the case are much easier to defend.
Strategic Implications for Business Owners
The availability of attorney’s fees shapes the economics of contract disputes in fundamental ways. Where fee-shifting applies, the stakes of winning and losing are much higher on both sides. A business with a strong case may be more willing to litigate rather than settle at a discount, knowing that its legal fees are potentially recoverable. A business facing a valid claim may be more willing to settle quickly before its fees mount to an unmanageable level, knowing that the other side’s fees could be added to the judgment against it.
These dynamics also affect settlement negotiations. In a case with a bilateral fee-shifting clause, both parties have an incentive to think carefully about the costs of continued litigation — not just their own fees, but the potential exposure for the other side’s fees as well. A defendant who prevails at trial can recover substantial fees in jurisdictions with strong fee-shifting provisions. This means that a plaintiff with a weak or speculative claim faces not only the risk of losing but also the risk of paying the defendant’s legal costs.
For small and mid-sized businesses, the practical lesson is to include fee-shifting provisions in your commercial contracts where appropriate, but to do so thoughtfully. A fee clause that runs in both directions — protecting you if you win, but exposing you if you lose — requires you to be genuinely confident in the merits of any dispute you pursue. It is not a clause to include reflexively without considering how it would function if you found yourself on the losing side.
Also consider the message a fee clause sends during negotiations. Some counterparties view a bilateral fee-shifting clause as a sign of good faith — an indication that both sides expect to honor the contract and believe they can defend their performance. Others view such clauses as aggressive or hostile. Understanding your counterparty’s likely reaction and calibrating your negotiating position accordingly is part of the art of commercial contract drafting.
Specific Situations Where Fees Are Often Available
Construction contracts frequently include attorney’s fee provisions, and many states have statutory fee-shifting rules specific to construction disputes. If your business is in construction or regularly contracts with construction companies, understanding the fee rules in your state is essential. Similar patterns exist in real estate contracts, franchise agreements, and certain types of commercial leases.
Franchise agreements almost universally include attorney’s fee provisions, typically favoring the franchisor. Many franchise disclosure documents and franchise agreements include mandatory fee-shifting language that can expose franchisees to substantial fee liability in the event of a dispute. If you are considering a franchise investment, the attorney’s fees provision in the franchise agreement deserves careful attention before you sign.
Contracts with governmental entities sometimes limit or prohibit attorney’s fee recovery, or subject it to specific procedural requirements. If your business contracts with federal, state, or local government, understand the specific rules that apply. Some federal procurement regulations have their own fee-shifting frameworks that differ from the general commercial rules.
Reviewing Your Contracts for Fee Provisions
Every business should periodically review its standard contracts, vendor agreements, and customer agreements to understand what fee provisions are currently in place. You may be operating under a patchwork of contracts — some with fee-shifting, some without, some with one-sided clauses that favor the other party — without a clear picture of your overall exposure. A systematic review allows you to standardize your approach and flag any contracts that create unacceptable risk.
When negotiating a new commercial contract, approach the fee clause with the same attention you would give to payment terms, termination rights, or liability caps. Consider whether you want reciprocal fee-shifting, one-way fee-shifting in your favor only, or no fee-shifting at all. Consider whether the clause should apply to all disputes or only those exceeding a certain dollar threshold. Consider whether it should cover appeals, arbitration, and collection proceedings, or only trial court litigation.
Finally, before filing or responding to a commercial contract lawsuit, have counsel analyze the fee provisions in the relevant agreements and the applicable statutory framework. Understanding the fee dynamics from the outset — rather than discovering a disadvantageous fee clause in the middle of litigation — allows you to make better strategic decisions about how to prosecute or defend the case and how aggressively to pursue or resist settlement.