- The loser
Most people assume it's (1): If we get sued unfairly, the other guy will have to pay our legal fees at the end of the day. Just like, if they hit your car, they pay for the repairs. Right?
Mostly, wrong. In America, it’s (3): Each side pays their own lawyer. (This may turn into (4). Whether to ask Mom for help is beyond the scope of this article).
exceptions. For business lawsuits, the biggest exception is, a contract dispute if and only if your contract specifically requires loser-pays. See my prior post about why to get contracts in writing. And loser pays the fees if the claim is under $10,000. There are also a few specific statutes that require the defendant to pay if he or she loses. For example, if your insurance company refused to cover a claim in bad faith, or if the winning party was harmed by a deceptive business practice. Of course, under any exception, you still have to make payments until you win, and the other side may not have the money to pay at the end (especially if he sued over less than $10K). Loser-pays provisions sound good, but don’t count on them.
What about (b), insurance? Sure, CGL or D&O insurance can be a great help, if
the claim is covered. Most business to business disputes aren’t covered. Neither, usually, are you covered when you sue someone. You’re not covered if the court finds that you were worse than negligent, at which point the insurer might even sue you to get back its payments for your legal fees. Then too, sometimes, insurers deny a claim that should be covered—and then someone like me gets called in to defend the original case AND sue the insurance company.
Lastly, people often ask me about contingency fees. That’s when the lawyer sort of goes into business with the client, putting his own money up to fund the lawsuit, and getting 40% of whatever they win. For obvious reasons, lawyers only do this in big-money personal injury-type cases. Anyway, you’re still the one paying—if you win an award, it’s because the other side in some way owed it to you; the lawyer is getting 40% of your award.
The moral of this story is: have a rainy day fund, you just might need it.
This post is part of a series by a lawyer serving Washington's business community. Disclaimer: I'm not your lawyer and this is not legal advice, every case is different.