While it may not be standard practice when drafting contracts to include a clause stating that “if litigation between the parties ensues the prevailing party will recover its legal fees,” such provisions do appear in a variety of contracts from time to time. A recent First Circuit opinion, Thompson v. Cloud, involves such a clause and also serves as a good reminder that it can be dangerous to take lightly even seemingly simple provisions in an agreement.
In Thompson, the contract at issue stated that all disputes:
[A]rising out of or relating to this Agreement … shall be submitted to mediation …. If a party does not agree first to go to mediation, then that party will be liable for the other party’s legal fees in any subsequent litigation regarding that same matter in which the party who refused to go to mediation loses in that subsequent litigation.
Notwithstanding the foregoing language, the plaintiff filed suit without ever suggesting that the parties mediate the underlying dispute. In response, the defendants filed a counterclaim, asserting that the plaintiff breached his obligation to engage in pre-litigation mediation. Ultimately, the defendants prevailed in the litigation and sought an order that the plaintiff reimburse them for their legal fees. The District Court refused to award legal fees to the defendants, and the First Circuit agreed it would not be appropriate to engage in fee shifting in this case.
As an initial matter, the First Circuit noted that while the mediation provision at issue could have been drafted so as to equate the filing of a lawsuit with a refusal to mediate, it was not. Rather, the prevailing party clause in the agreement took “a different approach by imposing the penalty of paying attorney’s fees only when a party ‘does not agree first to go to mediation.’” In light of this language, the Court reasoned that “the refusal to mediate [must] be clear before the heavy sanction of attorney’s fees can be imposed.” The Court then discussed that the defendants did not request mediation when the dispute was raised prior to the commencement of litigation, nor did they move to compel mediation after the plaintiff filed suit. Rather, the defendants actively engaged in litigating the matter in the District Court. In light of all of these circumstances, the First Circuit ultimately concluded, the plaintiff never clearly refused to mediate.
Accordingly, Thompson provides two relatively straightforward lessons for in-house counsel. First, when drafting a provision that calls for the prevailing party to recover its legal fees, a slight deviation in language and/or approach can have an enormous impact on its applicability, so be sure to say exactly what you mean. Second, if in-house counsel anticipates wanting to invoke a fee-shifting provision that does exist, be sure your client invokes all potential predicates to recovering legal fees. While “lying in wait” sometimes can be an appropriate and effective strategy, Thompson reminds us not to be so clever that we outsmart ourselves.