A costs and expenses clause decides who pays for the deal and who pays when the deal goes to court. The first half is routine: each side covers its own lawyers, accountants, and diligence. The second half is the one that costs money. A single sentence can flip the default rule and make the losing party pay the winner's legal fees. People skim this clause as boilerplate. It is not.
TL;DR
- A costs and expenses clause allocates two different things: transaction costs (negotiating and closing the deal) and litigation costs (enforcing or fighting over it). They are separate questions; read them separately.
- The market default for transaction costs is each party bears its own. The interesting variant is prevailing-party attorney fees, which shifts the winner's legal costs onto the loser.
- The US baseline is the American Rule: each side pays its own attorney fees unless a statute or contract says otherwise. A fee-shifting clause is how you contract around it.
- Fee-shifting is usually enforceable, but some states cut it down: a few read one-sided clauses as mutual by statute, and courts everywhere trim fees that are not reasonable. Confirm the governing state's rule.
- The expensive review miss is a one-sided fee clause you did not notice you signed, or a "prevailing party" term with no definition of who that is. Catch it before signing, not after the dispute.
What a costs and expenses clause actually does
The clause answers two unrelated questions, and treating them as one is the common mistake.
1. Transaction costs (the "getting to signing" question). This says who pays for negotiating, drafting, due diligence, and closing: each party's own counsel, advisors, filing fees, and the like. In most commercial deals the answer is each party pays its own. In some M&A and financing deals one side picks up specified costs (for example, a buyer covering the seller's filing fees, or a borrower covering the lender's expenses).
2. Litigation or enforcement costs (the "if we fight" question). This says what happens to legal fees if a dispute arises out of the contract. The default, absent a clause, is the American Rule: everyone pays their own. A fee-shifting provision changes that, usually by awarding the prevailing party its reasonable attorney fees and costs.
A well-drafted clause keeps these two ideas in separate sentences. One sentence handles deal costs. A separate sentence, if the parties want it, handles fee-shifting on a dispute. Blending them creates ambiguity about whether "costs" in a lawsuit includes attorney fees or only court filing fees.
Why it matters: the dollars at stake
Picture a $250,000 services contract. The customer stops paying, the vendor sues to collect, and the vendor spends $90,000 in legal fees to win a judgment for the unpaid balance.
- Under the American Rule with no fee clause, the vendor recovers the unpaid balance and eats the $90,000 in fees. The net win shrinks by the cost of the win.
- Under a prevailing-party fee-shifting clause, the vendor recovers the balance plus its reasonable attorney fees. The loser funds the litigation.
Same contract, same outcome on the merits, a $90,000 swing decided by one sentence. Fee-shifting also changes behavior before anyone files. It makes small claims worth pursuing and makes weak defenses expensive, so it raises the stakes of every dispute, not just the ones that reach a courtroom.
Who wants what
| Party likely to enforce (often the vendor or lender) | Party likely to be sued (often the customer or borrower) | |
|---|---|---|
| Transaction costs | Each side bears its own | Each side bears its own |
| Fee-shifting | One-sided in its favor, or prevailing-party | No fee clause at all (keep the American Rule) |
| "Prevailing party" | Broadly defined, including partial wins | Narrowly defined, or substantially-prevails standard |
| Scope of recoverable costs | Attorney fees, expert fees, collection costs | Court costs only, no attorney fees |
| Collection and enforcement | Costs of collection recoverable | Silent |
The pattern: the party that expects to enforce wants fee-shifting and a broad definition of costs. The party that expects to be on the defensive prefers the American Rule, where a plaintiff has to weigh its own legal spend before suing. A neutral, mutual prevailing-party clause sits in the middle and is the common compromise.
Market-standard language
Most commercial contracts handle transaction costs in a single line. A typical version reads close to this:
Each party shall bear its own costs and expenses, including legal and
accounting fees, incurred in connection with the negotiation,
preparation, and execution of this Agreement.
When the parties want fee-shifting on a dispute, they add a separate, mutual prevailing-party sentence:
If any action or proceeding is brought to enforce or interpret this
Agreement, the prevailing party shall be entitled to recover its
reasonable attorneys' fees, expert fees, and other costs incurred in
that action or proceeding, in addition to any other relief to which it
may be entitled.
A one-sided version, which favors only the drafter, looks like this and is the thing to watch for:
Customer shall reimburse Provider for all costs of collection,
including reasonable attorneys' fees, incurred in enforcing this
Agreement.
That last clause is mutual in appearance only. It lets the provider recover fees when it sues, but gives the customer nothing when the customer wins. Several states will read it as mutual anyway (see below), but you should not rely on a statute to fix a clause you can simply negotiate.
The negotiation: standard, fallback, walk-away
Treat transaction costs and fee-shifting as two separate trades.
| Issue | Opening position | Fallback both sides accept | Walk-away |
|---|---|---|---|
| Transaction costs | Each side bears its own | Each side bears its own, named items shifted | Open-ended reimbursement of the other side's deal costs |
| Fee-shifting | Mutual prevailing-party | Mutual, with a reasonableness limit | One-sided fee clause favoring the counterparty |
| "Prevailing party" | Defined as the party that obtains net relief | Substantially-prevails standard | "Prevailing party" left undefined |
| Recoverable costs | Attorney fees plus reasonable expert and collection costs | Attorney fees only, reasonable | Indemnity-style "all costs and losses" smuggled in |
| Cap on fees | No cap (rely on reasonableness) | Soft cap or tie to amount in controversy | Uncapped fees with a low underlying claim value |
The workhorse compromise is a mutual prevailing-party clause with a reasonableness limit. It keeps the incentive symmetric: whoever wins recovers, whoever loses pays, and the court can trim a padded fee request. That is easier to defend than either an uncapped one-sided clause or no clause at all.
Common variations (and the language that creates them)
Small wording changes produce very different clauses. The high-frequency ones:
- Mutual prevailing-party. "The prevailing party shall be entitled to recover its reasonable attorneys' fees." Symmetric and the most common negotiated outcome.
- One-sided / costs of collection. "Customer shall pay Provider's costs of collection, including attorneys' fees." Recovery runs one direction only. Common in financing and SaaS order forms.
- Substantially prevails. "If a party substantially prevails." This avoids the all-or-nothing fight over who won when both sides get partial relief.
- Indemnity for fees. Fee recovery routed through the indemnification clause as a "loss" rather than a standalone fee-shift. This can reach third-party claims the prevailing-party clause does not.
- Each party bears its own (no shifting). The American Rule by agreement. Common where both sides are repeat players and want to discourage litigation.
A clause that quietly broadens recovery looks like this:
The defaulting party shall pay all costs, expenses, and losses,
including attorneys' fees, arising out of or related to any default
under this Agreement.
Jurisdiction and enforceability notes
Fee-shifting clauses are generally enforced between sophisticated commercial parties, but the enforcement is not uniform across states. This was checked June 2026; confirm the current rule in the governing state before relying on it.
- The American Rule is the baseline. Absent a statute or contract, each side pays its own attorney fees. A fee clause is what overrides it, so silence means no fee-shifting.
- Some states convert one-sided clauses to mutual. California Civil Code section 1717 is the well-known example: in an action on a contract, a clause that awards fees to one party is read as awarding them to whichever party prevails, regardless of the one-sided wording. Other states have similar statutes for specific contract types (consumer, lease, construction). Do not assume a one-sided clause stays one-sided.
- Fees must be reasonable. Courts review the amount even when the contract says "all" fees. Padded, disproportionate, or unsupported fee requests get cut. A reasonableness qualifier in the clause is standard and rarely worth fighting.
- "Prevailing party" can be litigated on its own. If both sides win something, who prevailed is itself a dispute. A definition (net monetary recovery, or substantially prevails) heads off a second fight inside the first.
- Consumer and statutory contexts differ. Some consumer-protection and employment statutes carry their own one-way fee-shifting (plaintiff recovers, defendant generally does not) that a contract cannot override. A contractual clause does not displace those.
This is general information, not legal advice for a specific deal. The enforceability and reach of a fee clause turn on the governing law and the facts. For the rule that sets which state's law applies, see governing law.
Review checklist: red flags to catch
- The fee clause is one-sided (the counterparty recovers, you do not) when the deal reads as balanced.
- "Prevailing party" is undefined, so a partial-win dispute turns into a second fight over who won.
- The clause shifts "all costs and losses arising out of or related to" a breach, which is indemnity language hiding in the costs section.
- No reasonableness limit, inviting a padded fee claim on a small underlying dispute.
- Transaction costs are open-ended ("Party A shall pay all costs of the transaction") rather than each side bearing its own or named items only.
- The clause double-counts fees already recoverable through the indemnity, creating overlap and a dispute about which path controls.
- Collection-cost language is buried in a payment or default section and easy to miss on a fast review.
How it interacts with other clauses
The costs and expenses clause rarely stands alone. Read it together with:
- Indemnification: indemnities often recover legal fees too. Make sure the fee clause and the indemnity do not overlap or contradict on the same loss.
- Payment terms: costs of collection on overdue amounts usually belong here or are cross-referenced from here.
- Arbitration: the forum's rules and the clause together decide whether the arbitrator can award fees, and on what standard.
- Governing law: the chosen state decides whether a one-sided fee clause is read as mutual and how reasonableness is policed.
For the broader drafting workflow, see how to draft a contract. For the full set, browse the clause library.
FAQ
What is a costs and expenses clause? It is a contract provision that allocates who pays the costs tied to the agreement. It usually covers two things: the costs of negotiating and closing the deal, and the legal costs if a dispute arises. The default for deal costs is each party bears its own.
What is the American Rule on attorney fees? The American Rule is the US default that each party pays its own attorney fees regardless of who wins, unless a statute or a contract says otherwise. A fee-shifting clause is how parties contract around it so the loser pays the winner's fees.
What does "prevailing party" mean in a fee clause? It is the party that wins the dispute and so becomes entitled to recover its fees. Because partial wins make "who prevailed" unclear, well-drafted clauses define it, for example as the party with a net monetary recovery or the one that substantially prevails.
Is a one-sided attorney fees clause enforceable? Often, but not always as written. Several states, with California being the well-known example, treat a one-sided fee clause in a contract action as if it were mutual, so the prevailing party recovers regardless of the wording. Confirm the governing state's rule before relying on a one-sided clause.
Can you recover attorney fees without a clause? Usually not in the US. The American Rule means each side pays its own fees absent a statute or a contractual fee-shifting provision. Some statutes (certain consumer, employment, and civil-rights claims) provide their own fee recovery, but a general breach-of-contract claim does not.
What is the difference between costs and attorney fees? "Costs" in litigation often means court filing fees, service fees, and similar charges, which a prevailing party may recover by default. Attorney fees are the lawyers' charges and are generally not recoverable unless a statute or contract shifts them. A clear clause says whether "costs" includes attorney fees.
Should fee recovery go in the costs clause or the indemnity? Keep litigation fee-shifting in the costs clause and third-party-claim coverage in the indemnity. Routing fees through the indemnity can pull in first-party losses and broaden scope unexpectedly. If both clauses touch fees, make sure they do not overlap or conflict on the same loss.
Related clauses
Clauses that get negotiated alongside this one.
