Attorney fee clauses in contracts shift the cost of a lawsuit from the winner to the loser, overriding the American default rule that each side pays its own lawyers no matter who wins.1Justia Supreme Court. Alyeska Pipeline Svc. Co. v. Wilderness Society, 421 U.S. 240 (1975) A clause that holds up in court can be the difference between a profitable judgment and a Pyrrhic one, where $50,000 in legal fees chases $40,000 in damages and the winner leaves the courthouse poorer than they came. The language you choose when drafting the contract decides whether that happens. Everything below is about getting that language right.
Scope: What Disputes the Clause Covers
The single most consequential drafting choice is how broadly the clause defines the covered disputes. A narrow phrase such as “to enforce the terms of this agreement” limits fee recovery to straightforward breach-of-contract claims. If the fight involves fraud, negligent misrepresentation, or any tort that happened alongside the transaction, that narrow language will not reach it, and the party who committed the fraud can walk away without paying the other side’s legal bills even after losing on the merits.
Broader language such as “arising out of or relating to this agreement” captures those adjacent claims. Most litigators prefer this formulation because real disputes rarely stay neatly inside the four corners of a contract. Fraud, unjust enrichment, and tortious interference all grow from the same underlying deal, and the clause should reach the full range of what might actually go wrong.
Costs Beyond Attorney Hours
Attorney time is only part of what a lawsuit costs. Expert witnesses, forensic accountants, court reporters, and filing fees pile up quickly. If the clause refers only to “attorney fees” without mentioning the rest, a court may exclude those expenses from the award. Spell them out: expert witness fees, court costs, travel expenses, deposition costs, and any other out-of-pocket litigation expenses. The more specific the list, the harder it is for the losing side to argue a particular bill falls outside the clause.
E-discovery deserves its own line. Processing, reviewing, and producing electronically stored information can run into six figures in commercial disputes, and federal law limits what qualifies as a recoverable “cost” under 28 U.S.C. § 1920 to roughly the expense of converting files into producible format, not the broader work of collecting, reviewing, and managing data.2Office of the Law Revision Counsel. 28 USC 1920 – Taxation of Costs If you want the losing party to bear the full e-discovery burden, the clause has to say so. The federal cost statute alone will leave most of that bill unpaid.
Appeals, Arbitration, and Post-Judgment Enforcement
Silence about appeals is a trap. Some courts read a generic fee clause as covering the trial only, meaning the winning party pays its own bill for the appeal and for any proceedings needed to collect on the judgment. The fix is one line of drafting: fees incurred “at trial, on appeal, and in any post-judgment enforcement proceedings.” That way the fee-shifting protection follows the case to its actual conclusion, including the hunt for assets if the loser refuses to pay.
Arbitration raises the same issue in a different form. Under the American Arbitration Association’s Commercial Rules, an arbitrator can award attorney fees only when both parties request it, the contract authorizes it, or a statute authorizes it.3American Arbitration Association. Commercial Arbitration Rules and Mediation Procedures If the contract includes an arbitration clause but the fee provision refers only to “litigation” or “court proceedings,” the arbitrator may conclude the fee clause does not apply at all. Draft the fee language to reach “any action, proceeding, or alternative dispute resolution process arising from this agreement.” That phrasing covers court, arbitration, and mediation in one stroke.
Fee-Shifting Is Not Indemnification
Confusing a general indemnification provision with a fee-shifting clause is a common and expensive mistake. Indemnification typically covers losses caused by third-party claims: if someone outside the contract sues one party, the other picks up the tab. When the two signers of the contract sue each other, courts in many jurisdictions presume that a general indemnification clause does not reach that situation, and a vague reference to “reasonable attorney fees” tucked inside a definition of “losses” usually will not shift fees in a direct dispute between the parties.
Draft a standalone prevailing-party fee clause that explicitly addresses disputes between the signers. That removes any ambiguity about whether the parties meant to shift fees in their own fights, not just in lawsuits brought by outsiders.
Make It Mutual
Many contracts, especially leases, loan agreements, and consumer contracts, include one-way fee clauses that protect only the stronger party. A landlord’s lease might require the tenant to pay the landlord’s fees for an eviction while saying nothing about the tenant’s fees if the tenant has to sue over habitability. A number of states automatically convert a one-way fee provision into a mutual one, so a court applying that kind of reciprocity statute will extend the same right to the party the clause ignored.
The practical implication for drafting: assume any fee clause you write will apply to both sides. A one-way clause in a reciprocity jurisdiction accomplishes nothing except granting the other side a right you did not intend to grant, while leaving you with the false impression that the clause tilts in your favor.
Define the Prevailing Party in the Contract
A fee clause is only as useful as the court’s willingness to declare someone the winner, and that determination is less obvious than it sounds. Complex cases produce mixed results: one side wins the breach claim, the other wins on a counterclaim, and both lose on something. Courts use one of two common approaches to sort it out.
The “net winner” test looks at the bottom line. After every claim and counterclaim is resolved, which party came out ahead financially? A plaintiff who sued for $500,000 and recovered $300,000 while defeating the counterclaim is clearly the net winner. A case where the plaintiff wins $20,000 on one claim and the defendant wins $15,000 on another produces a much murkier picture, and the judge may conclude that nobody really prevailed.
The “significant issues” test asks whether a party achieved its primary litigation goals, not just whether it won any money. A plaintiff who sought $1,000,000 and recovered $5,000 has a judgment, but a court can find the recovery too trivial to call them the prevailing party. That prevents a party from engineering a nominal win just to trigger the clause.
Your contract can define “prevailing party” on its own terms rather than leaving the question to a judge’s intuition. That matters especially after Buckhannon Board & Care Home, Inc. v. West Virginia Department of Health and Human Resources, which held that a prevailing party must obtain a “judicially sanctioned change in the legal relationship of the parties,” meaning a judgment on the merits or a court-ordered consent decree.4Justia Supreme Court. Buckhannon Board and Care Home, Inc. v. West Virginia Dept. of Health and Human Resources, 532 U.S. 598 (2001) Under Buckhannon, a defendant who voluntarily gives the plaintiff everything they wanted before trial has not technically “lost,” and the plaintiff may not qualify as prevailing. If you want to capture that outcome, your contractual definition needs to say so.
What Courts Will Actually Award
Being declared the prevailing party does not mean you collect whatever your lawyer charged. Courts calculate fee awards using the “lodestar” method from Hensley v. Eckerhart: reasonable hours multiplied by a reasonable hourly rate.5Justia Supreme Court. Hensley v. Eckerhart, 461 U.S. 424 (1983) Both numbers get judicial scrutiny. The court reviews billing records line by line, flagging excessive hours, redundant work, and rates above what lawyers of similar experience charge locally. A junior associate billing at a senior partner’s rate is an easy target.
The lodestar figure carries a strong presumption of reasonableness, and the Supreme Court confirmed in Perdue v. Kenny A. that enhancements above the lodestar should be “rare” and “exceptional.”6Legal Information Institute (LII) / Cornell Law School. Perdue v. Kenny A., 559 U.S. 542 (2010) A $100,000 bill can easily come back as $70,000 if the judge decides some hours were unnecessary or the rates were inflated. Paralegal time is recoverable at market rates for work requiring legal skill, but purely clerical tasks like scheduling and filing do not become more valuable because a paralegal did them. Judges also scrutinize meetings and depositions attended by multiple timekeepers; if a partner, two associates, and a paralegal all billed for the same hearing, the fee applicant has to justify every seat at the table or watch the duplicative time get stripped out.
One narrow but important rule: an attorney who represents themselves cannot recover fees under a fee-shifting provision. The Supreme Court held in Kay v. Ehrler that fee-shifting exists to encourage parties to hire competent counsel, not to reward lawyers for handling their own cases.7Legal Information Institute (LII) / Cornell Law School. Kay v. Ehrler, 499 U.S. 432 (1991) That rule holds even when the attorney-litigant wins decisively.
Rule 68 Can Shut Off Your Clause Mid-Case
Federal Rule of Civil Procedure 68 is a strategic weapon that can neutralize a fee clause in the middle of litigation. A defendant can serve a formal offer of judgment at least 14 days before trial. If the plaintiff rejects it and then wins less than what was offered, the plaintiff must pay the costs incurred after the offer date.8Legal Information Institute (LII) / Cornell Law School. Federal Rule of Civil Procedure 68 – Offer of Judgment
Whether “costs” includes attorney fees depends on the underlying statute. The Supreme Court held in Marek v. Chesny that when the governing statute defines attorney fees as part of “costs,” those fees fall within Rule 68’s cost-shifting mechanism.9Justia Supreme Court. Marek v. Chesny, 473 U.S. 1 (1985) A plaintiff who turns down a reasonable settlement offer and then recovers less at trial can lose the right to any attorney fees incurred after the offer. The fee clause in your contract does not override that result. Litigants pursuing a fee award need to evaluate every Rule 68 offer with the fee cutoff in mind.
Why Courts Throw Fee Clauses Out
Not every fee clause survives review. Courts can strike a provision as unconscionable when a lack of meaningful bargaining power meets terms that are unreasonably one-sided. A take-it-or-leave-it consumer contract that forces the customer to pay the company’s fees for filing any complaint, even one the customer wins, discourages people from enforcing legitimate rights, and courts treat that as an unenforceable penalty.
Ambiguity is the other common killer. A clause referencing “costs and fees” without specifying attorney fees may be read to cover only filing fees and service costs. Where language can reasonably mean more than one thing, courts in most jurisdictions construe it against the drafter. Vague language benefits the other side, not yours. Precision at the drafting stage is the only point at which you still control what the words mean.
Public policy sets a third limit. A fee clause in an employment agreement that effectively prevents workers from pursuing wage claims, because the risk of paying the employer’s legal bills makes filing economically irrational, may be voided on public policy grounds even if both parties signed voluntarily.
Tax Consequences Worth Flagging
Winning fees under a court judgment creates tax exposure that catches many litigants off guard. Settlement and judgment proceeds are taxable income unless a specific code provision excludes them.10Internal Revenue Service. Tax Implications of Settlements and Judgments Damages for physical injuries are excluded; most contract recoveries are not. Attorney fees awarded on top of damages are included in gross income even when the check goes straight to the lawyer. You can win $200,000 in damages plus $80,000 in fees and owe tax on the full $280,000, even though $80,000 never passed through your account.
For certain claims, IRC § 62(a)(20) provides an above-the-line deduction for attorney fees and court costs paid in connection with employment discrimination claims, civil rights actions, and whistleblower awards, limited to the income received from the judgment or settlement in the same tax year.11Office of the Law Revision Counsel. 26 U.S. Code 62 – Adjusted Gross Income Defined For ordinary contract disputes, the picture is less favorable. The miscellaneous itemized deduction that previously allowed deducting legal fees exceeding 2% of adjusted gross income was suspended by the Tax Cuts and Jobs Act, and that suspension appears to have been extended under current law.12Office of the Law Revision Counsel. 26 U.S. Code 67 – 2-Percent Floor on Miscellaneous Itemized Deductions Businesses can still deduct litigation costs as ordinary expenses; individuals pursuing personal contract claims may find themselves taxed on fees they never received. Discuss any potential settlement or judgment with a tax professional before signing it.