The typical contract language
Anonymized aggregate of attorney's fees language we've reviewed:
"In the event Funder retains counsel for enforcement of this Agreement, Merchant and Guarantor shall be obligated to pay Funder's reasonable attorney's fees and costs, including but not limited to court costs, collection costs, expert witness fees, and any other litigation-related expenses. Reasonable attorney's fees shall include in-house counsel time at market rates. Such fees shall not be less than 25% of the obligation outstanding at the time of enforcement."
Key elements:
- "Reasonable attorney's fees" — courts apply reasonableness standard to challenge inflated claims
- "Including in-house counsel time at market rates" — funders often try to recover in-house counsel at outside rates
- "Not less than 25% of the obligation" — minimum fee floors often get disregarded by courts but funders include them anyway
- Notably absent: "If Merchant prevails, Merchant shall recover fees from Funder" — this is the one-way nature of the clause
What the funder typically recovers
- Outside counsel hourly fees — typically $250-$500/hour for commercial litigation, sometimes higher in NYC/Bay Area markets
- In-house counsel time — at market rates if the contract allows; some courts reduce to actual cost basis
- Court filing fees — $200-$500 per filing
- Service of process costs — $100-$200 typically
- Collection fees — third-party collection costs if applicable
- Expert witness fees — rare in MCA cases but allowed
- Travel costs — for out-of-state enforcement
On a $50,000 advance with $40,000 remaining balance, total attorney's fees and costs recovery for a contested enforcement can easily reach $15,000-$25,000 — making the total obligation $55,000-$65,000 from the original $50,000. The fee clause is one of the largest drivers of post-default damage.
How the "not less than 25%" floor works
Many MCA contracts include a minimum fee floor — typically 25-33% of the obligation. This is intended to discourage merchants from defending claims by making the litigation costly regardless of outcome.
In practice, most courts disregard these floors when the actual attorney work didn't justify the amount. A court applying reasonableness standard will:
- Calculate the actual hours worked by the attorney
- Apply the attorney's actual rate (or a reasonable market rate)
- Award that amount as fees, not the 25% floor
But not all courts do this. In some jurisdictions, the contractual floor is enforced. Always check the controlling state's case law for how this provision is treated.
State-by-state limits on attorney's fees
| State | Approach to MCA attorney's fees |
|---|---|
| California | Strict reasonableness review; floors often reduced. Civil Code §1717 makes one-way fee clauses mutually enforceable in some commercial cases. |
| New York | Generally enforces fees as written but applies reasonableness review to inflated claims. |
| Texas | Specific TX statute (Section 38.001) governs commercial fee recovery. Mutual when applicable; reasonableness review applies. |
| Florida | Strong reasonableness review; courts frequently reduce inflated fee claims. |
| Delaware | Generally enforces commercial fee provisions as written. |
What you can negotiate
- Mutual fee shifting — both parties recover fees if they prevail. Balances risk and discourages frivolous enforcement.
- Reasonable hourly rates only — cap fee recovery at actual reasonable hourly fees, removing the 25%+ floor.
- Outside counsel only — exclude in-house counsel time from fee recovery.
- Cap on total recovery — some funders accept a dollar cap on fee recovery (e.g., $25K maximum regardless of contract).
Defensive strategies if you're in litigation
- Challenge in-house counsel calculations. Demand actual hourly records and reasonableness justification.
- Challenge floor provisions. Argue against contractual floors based on reasonableness standard.
- Counter-claim or affirmative defenses. If you can establish funder breach (e.g., reconciliation refusal, improper acceleration), you may be able to argue for offsets to the fee recovery.
- Settlement timing. Settlement before extensive litigation dramatically limits fee accumulation. Even when the underlying obligation is settled, the funder may be willing to drop fee claims.
Frequently asked questions
- Why are attorney's fees clauses one-sided in MCA contracts?
- Standard contract drafting favors the drafter. MCA contracts are drafted by funders and typically grant the funder attorney's fees if they prevail, but don't grant merchants attorney's fees if the merchant prevails. This is called a 'one-way fee shifting' provision. It significantly increases merchant risk in litigation.
- Can the funder recover fees even if they only partially prevail?
- Often yes. Most attorney's fees clauses are triggered by 'prevailing party' status, which courts interpret broadly. Even if the funder only wins on some claims, they may be entitled to attorney's fees on the entire matter. This creates significant exposure for merchants who could otherwise mount a partial defense.
- Are there limits on how much funders can recover for fees?
- Most states have a 'reasonableness' requirement that limits attorney's fees recovery to amounts actually reasonable for the work performed. Some funders attempt to charge 25-40% of the obligation as a flat 'reasonable fee' — courts often reduce this to actual hourly fees, which are typically lower. The contract may say 'reasonable attorney's fees of not less than 25% of the obligation' but courts often disregard such floors.
- Do attorney's fees clauses survive bankruptcy?
- Generally yes — the personal guarantee with attorney's fees provisions survives a business bankruptcy and follows the guarantor personally. This can dramatically increase the post-bankruptcy obligation. The exception is personal bankruptcy, where unsecured fee obligations may be discharged.
- Can I negotiate to make attorney's fees mutual?
- Sometimes. Direct funders (Credibly, OnDeck, Bluevine) occasionally agree to mutual fee shifting — both parties recover fees if they prevail. This balances the risk and discourages frivolous enforcement. Broker-placed deals rarely budge on this.
- What if the funder's attorney is in-house counsel?
- In-house attorney fees are recoverable in most jurisdictions if the contract allows, but typically only at the rate of comparable outside counsel time. Some courts limit recovery to actual costs (salary allocation) rather than market rates. This is a useful defensive position for distressed merchants — challenging the calculation method can reduce fees recovered.