Know the ‘American Rule’

Insights on collecting attorneys’ fees in a collection action

You get a call from a long-standing customer or a prospective client wanting to purchase your products or services. You may have had the customer complete a credit application; or maybe you have a signed contract; or maybe you just had an oral agreement. No matter the arrangement, you fulfilled your obligation and issued an invoice. But time goes by and you don’t receive payment. You call several times and resend the invoice yet still no payment. Now you have no choice but to sue to collect your money.

In my practice, I work with manufacturers, wholesalers/distributors, and design professionals with collection issues. Almost invariably I am asked, “If we win in Court, can I get my attorneys’ fees back?” The answer is not always well received because the answer is, “It depends.”

Generally, in Pennsylvania attorneys’ fees are only recoverable in a successful lawsuit if provided for by contract or statute. This is known as the “American Rule.” Unless stated otherwise in a contract, each party to a lawsuit pays its own attorneys’ fees. So, if your agreement is oral, you are most likely out of luck.

Now, just because an agreement is in writing does not mean you automatically recover your attorneys’ fees. Even if you think you had your bases covered with a credit application or a contract, recovery of your attorneys’ fees is specifically dependent upon the precise language in your contracting document. Typically, the best chance of being able to collect attorneys’ fees is to include language in the contract or credit application such as, “the prevailing party shall be entitled to recover from the non-prevailing party to such action the cost of reasonable attorneys’ fees and expenses incurred by the prevailing party.” If you are the “prevailing party,” then the attorneys’ fees spent to win the lawsuit are most likely recoverable and added to the amount you are owed—provided the attorneys’ fees are reasonable. Make sure the language you are relying upon to provide for attorneys’ fees is clear. You do not want to use ambiguous language thinking that the more general the language, the more likely your customer will agree to it. Ambiguous language will be viewed unfavorably and most likely will not be enforced by the Court.

Preparing your contracting document in such a way to allow for the recovery of attorneys’ fees also gives you leverage in collecting prior to a lawsuit. All too often that customer has not paid you because he is trying to get a discount on the agreed upon price and assumes you could settle for a lesser price to avoid the cost of litigation. However, if attorneys’ fees are recoverable as specified in your documents, that leverage disappears.

Additionally, a statutory claim is one that relies on a law passed by the legislature rather than a common law principle set by a court. If the same collection claim has facts that can also make it a statutory claim, like a claim pursuant to the Contractor and Subcontractor Payment Act or the Prompt Payment Act, then the prevailing party again most likely can collect its attorneys’ fees. However, not many collection claims outside of a construction collection claim have facts that can meet the criteria necessary to pursue a statutory claim.

Just like getting your check-up with your physician, it’s a good practice to have your contracting documents examined by an attorney. This attorney can check the vitals of your contracting procedures as well as the terms and conditions of your contracting documents, including your demand for attorneys’ fees. By doing so, you will increase your odds of recovering the principal, and hopefully, the attorneys’ fees you incurred.