Make the Loser Pay

April 13, 2006

	Visited: 193
	Not rated
	Rate:

The civil litigation system itself represents a significant risk factor and exposure to liability. Therefore, it is important that small business owners employ the various strategies that allow them to control the risk factors in litigation.

Generally, the United States lacks a loser pays system. However, two exceptions exist: the contract exception and the statutory exception. With either of these two exceptions, the loser in the court action will have to reimburse the winner for his attorney's fees and related costs.

However, caution must be exercised here, as the exceptions do not always apply to both parties to the court action. Typically, the exceptions authorize reimbursement only to the plaintiff, when the plaintiff wins the action.

With careful planning, the small business owner may be able to use the contract exception to provide for reimbursement in the event he or she is the defendant and prevails in the action. Further, in some situations, a statute may provide an exception that authorizes reimbursement to the defendant when he or she prevails in the action.

Work Smart

Often, a contract provision or a statute will be one-sided, allowing only reimbursement to the party who brought the claim, provided they are successful. In other words, the exception commonly does not provide for reimbursement to defendants who successfully defend against the claim.

However, the small business owner has the power, in theory, to modify a provision in a proposed contract to provide for such reimbursement. He may want to do this if he believes he is more likely, or perhaps just as likely, to be the defendant in the dispute, rather than the plaintiff. In practice, the power to accomplish this task will depend on the relative bargaining power of the small business owner.

Of course, a small business owner has no power to modify a statute that provides for reimbursement only to the plaintiff. However, certain statutes, which are relatively unusual, may authorize reimbursement to a successful defendant. Further, the defendant can effectively reverse the roles of the parties through the assertion of a counterclaim. In the counterclaim, the defendant, in effect, becomes a plaintiff, seeking monetary damages against the party that filed the lawsuit. Thus, if a counterclaim is based on a statute that authorizes reimbursement to a successful plaintiff, the defendant can recover his attorney's fees and related costs in bringing the counterclaim if he is successful. Of course, this recovery would be in addition to the monetary damages that would be awarded for the counterclaim itself.