Is Fee Shifting Dangerous? Risks & Red Flags to Watch For

Fee shifting is a contract provision that determines who pays legal fees if a dispute arises. Typically, each party pays their own attorney fees, but a fee shifting clause can require the losing party—or sometimes only one party—to cover all legal costs. These clauses are often found in commercial agreements, service contracts, and real estate deals.

While fee shifting can seem fair, it can also create significant financial risks. Here’s why:

• Financial Pressure: If you lose a dispute, you could be responsible for both your own and the other party’s legal fees, which can be substantial.
• Discourages Legitimate Claims: The threat of paying the other side’s fees may prevent you from pursuing valid claims or defenses.
• One-Sided Clauses: Some agreements only allow one party (often the drafter) to recover fees, creating an unfair advantage.

Before agreeing to a fee shifting clause, consider these risks:

• Unpredictable Costs: Legal fees can escalate quickly, making potential liabilities difficult to estimate.
• Imbalance of Power: Larger companies may use fee shifting to intimidate smaller parties.
• Broad Language: Vague or overly broad clauses can lead to disputes about what fees are covered.

Watch for these red flags when reviewing fee shifting provisions:

• One-way Fee Shifting: Only one party is entitled to recover fees.
• No Cap on Fees: There’s no limit to the amount recoverable.
• Ambiguous Terms: The clause doesn’t clearly define what constitutes recoverable fees.
• Applies to All Disputes: The clause covers more than just breach of contract, such as tort claims or regulatory actions.

To reduce your exposure to dangerous fee shifting clauses:

• Negotiate for mutual fee shifting or removal of the clause altogether.
• Request clear definitions and reasonable caps on recoverable fees.
• Consult legal counsel before signing any contract with a fee shifting provision.
• Use AI-powered contract review tools like Flag Red to quickly spot risky clauses and red flags.