Prevailing party attorney fees: what a prevailing party attorney fees clause does to an unpaid invoice claim, and how to write the attorneys fees clause

Prevailing party attorney fees are legal fees the losing side of a lawsuit pays to the winner. They are not the default in the United States. Under the American Rule, confirmed by the Supreme Court in Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240 (1975), each side pays its own lawyer no matter who wins, unless a contract or a statute says otherwise. For a business chasing an unpaid invoice, that one default decides more claims than the merits do.

Here is the practical version. On a $12,000 invoice, spending $9,000 on counsel to recover $12,000 is barely worth the trouble, and it is a straight loss if the debtor stalls. Add a clause that shifts fees to the loser and the same claim becomes worth bringing, because you are now suing for the invoice plus interest plus the cost of suing. The clause also changes the conversation long before a courtroom does, since a debtor who knows they will fund both sides settles sooner.

What is a prevailing party attorney fees clause?

A prevailing party attorney fees clause is a contract term saying that whichever side wins a dispute about the contract can recover its reasonable legal fees from the other. A typical version reads that in any action to enforce the agreement, the prevailing party is entitled to recover its reasonable attorney fees and costs.

The clause matters because it is one of the only ways to escape the American Rule. Courts will enforce it as written, which is exactly why the wording repays attention. Two drafting choices do most of the work: whether the clause runs to both parties or only to you, and whether it covers fees incurred before a lawsuit, such as the cost of a demand letter or a collection effort.

One sided clauses are common in supply agreements and credit applications, because the party writing the paper naturally writes it in their own favor. That instinct is understandable and, in several states, completely ineffective.

Which states make a one sided attorneys fees clause reciprocal?

Several states have decided by statute that a fee clause favoring only one party will be read as favoring whichever party wins. If you sell into these states, a clause drafted purely for your benefit still works, but it works for your customer too.

Hawaii is usually listed with this group at Haw. Rev. Stat. 607-14. The Utah distinction is worth holding on to: in California, Oregon, Washington and Montana the reciprocal right is mandatory, while Utah leaves it to the court's discretion. Do not assume a state that appears on the list gives you the same certainty as the one next to it.

The practical lesson for a creditor is counterintuitive. Writing a mutual clause costs you nothing in these states, because you get a mutual clause whether you want one or not. It also removes an argument the debtor would otherwise make about the clause being unconscionable, and it makes the contract easier to get signed.

Texas gives you attorney fees with no clause at all

Texas is the state worth knowing in detail if you sell there, because it does not depend on your contract. Under Tex. Civ. Prac. and Rem. Code 38.001(b), a person may recover reasonable attorney fees on a claim for rendered services, performed labor, furnished material, a sworn account or an oral or written contract, from an individual or organization other than a quasi governmental entity authorized to perform a function by state law, a religious organization, a charitable organization or a charitable trust.

That wording is newer than most advice you will find. House Bill 1578, effective for actions filed on or after September 1, 2021, added "organization" to the statute. Before that amendment the section reached individuals and corporations but not LLCs or partnerships, so an LLC could lose a contract case and still walk away without paying your fees. Guidance written before late 2021 says you cannot recover fees against an LLC in Texas. That is now wrong.

Texas attaches procedure to the benefit, and this is where creditors lose it. Section 38.002 requires three things: the claimant must be represented by an attorney, the claimant must present the claim to the opposing party or a duly authorized agent, and payment of the just amount owed must not have been tendered before the thirtieth day after the claim is presented. Presentment is a real step with a real clock. Send the demand, prove you sent it, and let 30 days run before you file. Skip it and you keep the debt but lose the fees. Our guide to Texas commercial debt collection laws covers how this interacts with the state's 6 percent statutory interest rate.

What does "prevailing party" actually mean?

Less than people assume. A prevailing party is normally the one in whose favor final judgment is rendered, which is simple when you win the whole invoice and awkward when you do not. If you sue for $40,000, the customer counterclaims over defective goods, and you are awarded $22,000, both sides will argue about who prevailed.

Courts generally look at who obtained the greater relief on the contract, and in some states they have discretion to find that nobody prevailed. That uncertainty is an argument for realistic settlement rather than for fighting to a verdict, and it is another reason a well documented claim is worth more than an aggressive one. The cleaner your paperwork, the closer you get to a full award and the less room there is to dispute who won.

How to write an attorneys fees clause that actually helps

Keep it short and cover the gaps that cause arguments later.

• Make it mutual. In reciprocity states you get mutuality regardless, and it removes a fight about enforceability everywhere else.
• Cover pre-litigation collection costs, not only fees in an action. Otherwise the cost of demand letters and collection work is not recoverable even when the fees of the lawsuit are.
• Say "reasonable", since courts will impose that standard anyway and the word makes the clause easier to enforce.
• Pair it with an interest term and a clear due date, so the amount claimed is easy to calculate and hard to dispute.
• Put it in the credit application, not just the master agreement. The credit application is the document customers actually sign, and it is often the only signed paper in the file.

Then make sure someone can find it. When a claim finally goes out the door, the person building it needs the signed terms, every invoice, the delivery evidence and the payment history in one place. Totaling an aging book across two years of billing is much faster once you get the invoice data out of the PDFs and into a spreadsheet instead of reconstructing it by hand from a folder of scans.

Does the clause help if you never go to court?

That is where most of its value sits. A fee shifting clause changes the arithmetic for the debtor before anything is filed. A customer weighing whether to keep stalling on a $30,000 balance thinks differently when losing means paying $30,000 plus interest plus your legal costs on top of their own.

Quote the clause in your demand letter for payment, by section number, along with the interest rate and the running total. Doing that turns an abstract threat into a specific number and gives the debtor's own counsel a straightforward reason to advise settlement. It is the single cheapest piece of leverage a creditor has, and most never use it because nobody reads the contract until the lawsuit is already being drafted.

When fees still do not make suing worthwhile

Fee shifting improves the economics. It does not fix collectability. A judgment for the invoice plus fees against a company with no bank balance and no assets is worth exactly what any other unenforceable judgment is worth, and you will have spent more to get it. Check whether the debtor is still trading and owns anything before the clause tempts you into a case you cannot collect on.

It also does not shorten the deadline you are working against. If you sold goods, UCC 2-725 gives you four years in every state except Louisiana, which is shorter than the general written contract period in most of them. The best fee clause ever drafted is worthless on a claim that is time barred. Work through the full sequence in our guide to taking legal action for non payment of invoices, which covers collectability, the deadlines and forum limits state by state.

The honest summary: a prevailing party clause is the cheapest insurance you can put in a contract, it costs nothing until you need it, and it is worth more on mid sized invoices than on either very small or very large ones. Add it to the credit application this quarter and it will quietly improve every collection conversation you have from then on.

This is general information about US commercial contracts, not legal advice. Fee statutes and their interpretation vary by state and change; confirm the current position with an attorney licensed in the relevant state before relying on it.