What Does Fee Shifting Mean? Fee Shifting Explained

Fee shifting is a contractual provision that outlines which party will pay attorney’s fees and other legal costs if a dispute arises from the contract. In the absence of a fee shifting clause, each party typically pays their own legal fees, regardless of the outcome. However, with a fee shifting clause, the losing party—or sometimes the prevailing party—may be required to cover both sides’ legal expenses.

Fee shifting clauses can be structured in several ways, depending on the intent of the parties and the nature of the agreement. The most common types include:

• One-way fee shifting: Only one party (usually the non-drafting or weaker party) is entitled to recover legal fees if they prevail in a dispute.
• Two-way (mutual) fee shifting: Either party can recover attorney’s fees if they win a dispute.
• Loser pays: The party that loses the dispute must pay the legal fees of the winning party.

The specific language of the clause will dictate when and how fees are shifted, so careful review is essential.

Fee shifting clauses can have a major impact on your potential costs in the event of a dispute. If you agree to a clause that requires you to pay the other party’s legal fees, you could face significant financial exposure—even if the dispute is minor. Conversely, a well-drafted fee shifting clause can help deter frivolous lawsuits and provide leverage in negotiations.

Always read and understand fee shifting provisions before signing a contract. If you’re unsure about the implications, consult with a legal professional or use an AI contract risk scanner like Flag Red to identify and explain these clauses quickly.

Here are a few sample fee shifting clauses you might encounter:

• “In the event of any dispute arising out of this Agreement, the prevailing party shall be entitled to recover reasonable attorney’s fees and costs.”
• “If either party brings an action to enforce this contract, the losing party shall pay all legal fees incurred by the prevailing party.”

Notice how the wording determines who pays and under what circumstances.

Fee shifting language may not always be obvious. Look for terms like “attorney’s fees,” “prevailing party,” or “costs of litigation.” If you find such language, consider:

• Who is obligated to pay fees?
• Under what circumstances?
• Are the terms mutual or one-sided?

Flag Red’s AI contract risk scanner can help you quickly identify and interpret fee shifting clauses before you sign.