For tech startups, contracts with software developers, marketing agencies, designers, and other service providers are the foundation of business operations. Yet, despite best intentions, contract disputes are common. When legal action becomes necessary, one of the most important but often overlooked considerations is who pays the attorneys’ fees.
Under the American Rule, each party in a lawsuit typically bears its own legal costs—unless the contract includes an attorneys’ fees clause. This provision can determine whether a startup can realistically enforce its rights without being burdened by excessive litigation costs.
Should tech startup contracts include an attorneys’ fees clause? The answer depends on risk management, negotiation leverage, and potential dispute scenarios.
What Is an Attorneys’ Fees Clause?
An attorneys’ fees clause is a contractual provision stating that the losing party in a legal dispute must pay the prevailing party’s legal costs. This clause is commonly found in vendor agreements, software development contracts, SaaS agreements, and independent contractor agreements.
Without this clause, even if a startup wins a dispute, it may still have to cover thousands (or millions) in legal fees. Including an attorneys’ fees clause shifts that burden to the losing party, providing financial protection in case of litigation.
Why Tech Startups Should Consider an Attorneys’ Fees Clause
Service providers or contractors may threaten legal action as a negotiation tactic, even when their claims lack merit. A mutual attorneys’ fees clause discourages bad-faith litigation since the losing party risks covering both sides’ legal fees.
If a developer fails to deliver a promised software product or a marketing agency underperforms, a startup may hesitate to pursue legal action due to the potential cost of litigation. With an attorneys’ fees clause, startups can enforce contracts without excessive financial risk.
Tech startups often contract with large agencies, software firms, or well-funded service providers. Without an attorneys’ fees clause, tech startups may lack the resources to challenge breaches of contract. This provision helps equalize power dynamics by ensuring fair access to legal remedies.
Potential Downsides of an Attorneys’ Fees Clause
Potential Downsides of an Attorneys’ Fees ClauseWhile beneficial in many cases, an attorneys’ fees clause also carries potential drawbacks.
If a startup loses a contract dispute, it could face not only damages but also the other party’s legal fees. For early-stage companies with limited cash flow, this can pose a significant financial risk.
Some developers, agencies, and contractors may resist signing agreements with attorneys’ fees provisions, fearing legal exposure. This can lead to longer contract negotiations or even lost business relationships.
Certain jurisdictions, such as California, impose limitations on attorneys’ fees clauses in specific contracts. Courts may also reduce excessive legal fees, preventing the clause from offering full reimbursement.
When Should a Tech Startup Include an Attorneys’ Fees Clause?
For contracts involving core software development, intellectual property licensing, or major marketing partnerships, an attorneys’ fees clause is often essential. These agreements directly impact the startup’s success, and legal disputes could be costly.
If a startup is hiring multiple contractors (rather than working as a contractor itself), it may have a greater need to enforce agreements. In these cases, including an attorneys’ fees clause strengthens contractual enforcement power.
In states like California, New York, and Texas, attorneys’ fees clauses are generally enforceable if properly drafted. However, in some jurisdictions, statutory laws may limit or alter enforcement, so consulting a business attorney is advisable.
Alternatives to a Standard Attorneys’ Fees Clause
For startups concerned about exposure, there are alternative ways to structure legal fee provisions:
- Caps on Fee Recovery – Limits the maximum attorneys’ fees that can be recovered.
- One-Way Attorneys’ Fees Clause – Allows only the startup to recover fees, not the contractor. Some jurisdictions, like California, will convert one-way clauses into mutual provisions under Civil Code § 1717.
- Mediation and Arbitration Clauses – Requires disputes to go through alternative dispute resolution (ADR), which is often cheaper than litigation.
Choosing the right approach depends on the startup’s risk tolerance and contractual priorities.
Protecting Startups in Contract Disputes
Tech startups face complex contractual relationships with developers, agencies, and contractors. Including an attorneys’ fees clause in tech startup contracts can:
- Deter baseless lawsuits.
- Ensure enforceability of key agreements.
- Protect against financial losses in litigation.
However, startups must also weigh potential risks, including increased exposure in adverse rulings and potential negotiation challenges.
For startups navigating contract drafting, dispute resolution, and risk management, working with an experienced business attorney is essential.
David Nima Sharifi, Esq., founder of L.A. Tech and Media Law Firm, is an expert in startup contracts, technology law, and business litigation strategies. Recognized among the Top 30 New Media and E-Commerce attorneys by the Los Angeles Business Journal, he provides expert legal guidance on structuring agreements that protect startups.
Schedule your confidential consultation now by visiting L.A. Tech and Media Law Firm or using our secure contact form.
