The Contract Clause Small Businesses Should Never Go Without: Fee-Shifting Provisions

Did you know the default rule in Colorado is that each party to a lawsuit pays their own attorneys’ fees, no matter who prevails? Colorado law also generally prohibits a non-attorney from representing a company in court, subject to a few exceptions. Small businesses often are required by law to hire a licensed attorney to initiate, or even defend against, a lawsuit.

Under this default rule that each party pays their own attorneys’ fees, many small businesses find it cost prohibitive to initiate a legal action to collect a debt or enforce a contract. When taking a case to trial costs more than the amount owed, many businesses decide to write off bad debts rather than take legal action to collect them.

The law, however, provides a relatively simple exception to the default rule—fee-shifting clauses in a contract. There are two main types of fee-shifting provisions: reciprocal and one-way. A reciprocal fee-shifting clause is a contractual provision specifying that the winner pays the loser’s fees in the event of a lawsuit. A one-way fee-shifting provision instead states that if the business wins the lawsuit, the opposing party pays the business’ attorneys’ fees, but if the business loses the lawsuit, both sides pay their own fees. One-way fee-shifting provisions are sometimes viewed with higher scrutiny, but Colorado courts have enforced one-way fee-shifting provisions.

Many small businesses already require that their customers and clients sign a standard form contract at the outset of a business transaction. By including a fee-shifting provision in that contract, a small business could recover tens of thousands of dollars (or more) in attorneys’ fees spent to collect debts and enforce contracts. In this litigator’s opinion, a fee-shifting clause is the single most valuable contract clause that businesses should include in their form contracts.

A few words of caution. A reciprocal fee-shifting provision can be a double-edged sword if the business is the party who doesn’t abide by their duties and obligations under the contract. Businesses should also not expect to recover unlimited attorneys’ fees—courts apply a “reasonableness” analysis when deciding how much to award a prevailing party for their attorneys’ fees, based on the specific facts of the case at issue.

Businesses who include a fee-shifting provision in their contracts provide themselves a tremendous financial advantage when facing the daunting prospect of a lawsuit. As the adage goes, an ounce of prevention is worth a pound of cure.

Lia Szasz