Fee Shifting Red Flags: Warning Signs & Risks in Contracts

Fee shifting is a contractual provision that determines who pays legal fees in the event of a dispute. Instead of each party paying their own attorneys, a fee shifting clause may require the losing party—or sometimes just one specific party—to cover all legal costs. While this can seem fair, these clauses can create significant financial exposure if not carefully reviewed and negotiated.

• One-Sided Clauses: Beware of provisions that only require one party (often the weaker party) to pay all legal fees, regardless of outcome.
• Ambiguous Language: Vague terms like "all costs and expenses" can broaden the scope beyond just attorney fees, leading to unexpected liabilities.
• Triggering Events: Some clauses are triggered by any dispute, not just those where a party is found at fault—meaning you could pay even if you win.
• No Cap on Fees: Absence of a reasonable cap or limit can result in runaway legal bills.
• Unilateral Fee Shifting: Provisions that only benefit one party, rather than mutual fee shifting, are a major warning sign.

Dangerous fee shifting clauses often appear in boilerplate or template contracts. Watch for:

• Clauses buried in the "Miscellaneous" or "Legal Fees" sections
• Language that states, "The prevailing party shall be entitled to recover its attorneys’ fees and costs," without defining "prevailing party"
• Provisions that apply to all disputes, not just those involving breach of contract
• Requirements to pay fees "on demand" or before a final court decision

Failing to spot and address dangerous fee shifting clauses can result in:

• Unexpected financial liability for the other party’s legal costs
• Chilling effect on your willingness to pursue valid claims or defenses
• Unfair leverage for the opposing party during negotiations or litigation
• Potential for abuse in frivolous or bad-faith lawsuits

• Carefully review all fee shifting language before signing any contract.
• Negotiate for mutual, reasonable, and clearly defined fee shifting provisions.
• Insist on limits or caps on recoverable fees and costs.
• Seek legal advice if you’re unsure about the implications of any clause.
• Use contract risk scanning tools like Flag Red to automatically detect and flag dangerous fee shifting clauses.