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Circumstances vary regarding when you can recover attorneys' fees

Nobody likes paying attorneys' fees. Even if you successfully prosecute or defend a lawsuit, the legal costs are likely to make it a Pyrrhic victory.

The basic rule in the U.S. is each party is responsible for his or her own attorneys' fees regardless of the outcome of the case. This is known as the American rule. In contrast, the English rule, also known as the "loser pays" rule and followed in England, Canada and European countries, has the loser pay his or her own and the prevailing party's attorneys' fees. The specter of paying not only your legal fees but also the other party's legal fees causes litigants to be more circumspect when deciding to prosecute or contest a suit and increases pressure to reach an early settlement. On the other hand, the American rule is more in keeping with the traditional American view that everyone should have ready access to the courts.

Although every state except Alaska generally follows the American rule, contracting parties can make their own agreement regarding recovery of attorneys' fees, and courts typically will uphold those contract provisions. Consistent with the principle of "freedom of contract" (meaning parties generally are free to negotiate their own contract terms), you can deviate from the American rule simply by adding a provision in a contract governing payment of attorneys' fees.

For example, you can reverse the American rule by adding a sentence stating the prevailing party is entitled to recover attorneys' fees in the event of a dispute. Inclusion of such a provision when drafting or negotiating a construction contract is the most direct way you can deviate from the American rule if you desire to do so but can be a double-edged sword.

Alaska exception

Unlike other states, Alaska has long adhered to a rule that provides for the prevailing party to recover a portion of its attorneys' fees in most civil cases. In Alaska, the prevailing party is entitled to recover a percentage of its attorneys' fees based on a schedule that provides for 20 percent of the first $25,000 of attorneys' fees and 10 percent thereafter for judgments more than $25,000 in contested cases with a trial. The percentage awarded is less for contested cases that did not go to trial and lesser still for noncontested cases. A prevailing party that successfully defends a case where there is no money judgment is awarded 30 percent of its actual attorneys' fees in a case that goes to trial and 20 percent in a contested case that was resolved before trial.

In a highly unusual 3-2 decision in 2017, the Idaho Supreme Court came close to abrogating the American rule by drastically expanding the range of cases in which the losing party could be liable for the prevailing party's attorneys' fees. Before the decision, Idaho's rules of civil procedure, in effect since 1979, followed the common rule that attorneys' fees only could be recovered in the absence of a contract provision when a suit or defense was found to be frivolous or without foundation. The 2017 Idaho Supreme Court decision stated attorneys' fees could be recovered "when justice so requires" based on a 1976 Idaho statute stating that in any civil action, a judge may award reasonable attorneys' fees to the prevailing party unless another statute applies. The Idaho legislature may enact a statute negating the Idaho Supreme Court's decision.

Contractual attorneys' fees

Always be on the lookout for contract provisions that allow only the other party to recover its attorneys' fees. General contractors routinely include indemnification provisions in subcontracts that include recovery of attorneys' fees and typically include a provision stating the general contractor is entitled to recover all legal expenses if the general contractor brings a legal claim against the subcontractor to enforce the terms of the contract, including enforcing the indemnification provision.

A subcontractor always should modify one-way provisions that are drafted to allow only the general contractor to recover its attorney's fees by substituting a provision stating the prevailing party is entitled to recover attorneys' fees. Thirty-one states enforce one-way attorneys' fee provisions. California, Florida, Hawaii, Montana, Oregon, Utah and Washington have enacted rules allowing a prevailing party to recover its attorney's fees. Six other states have limited reciprocal attorneys' fees rules that apply to certain contracts, typically consumer and installment contracts and residential leases. The safe practice is to change the contract yourself during the contract review and negotiation process. Also, always add a provision to all contracts stating the contractor is entitled to recover legal expenses, including attorneys' fees, if they are not paid.

Although the rule that each party is responsible for its own attorneys' fees is still, by far, the prevailing U.S. practice, many statutes have been enacted at the state and federal levels that alter the basic American rule in particular circumstances.

Assuming there is no applicable provision in the contract regarding attorneys' fees, whether you might be able to recover attorneys' fees or face liability to pay an opposing party's legal fees in civil litigation is a function of state law. Many states have enacted consumer protection laws that allow a consumer to recover attorneys' fees in the event the defendant is found to have engaged in unfair or deceptive trade practices. Whether you are a plaintiff or defendant, you will want to determine at the outset of litigation or arbitration whether you can recover or be liable for attorneys' fees.

States allowing recovery

Although the general rule is a prevailing party cannot recover attorneys' fees in the absence of a contract provision allowing such recovery, states have enacted statutes that make exceptions to the American rule. The exception to the American rule that is of particular interest to construction contractors are statutes that provide for recovery of attorney fees in contract claims without an express contract provision. However, only a few states, including Arizona and Texas, allow recovery of reasonable attorneys' fees in a breach-of-contract suit when there is no contract provision providing for recovery of attorneys' fees.

The Arizona statute states that in any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorneys' fees. Unlike most states, in Arizona, the prevailing party may receive reasonable attorneys' fees in any suit arising out of a contract even though there was no such provision in the contract.

In Texas, a person may recover reasonable attorneys' fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for rendered services, performed labor, performed materials, or for breach of an oral or written contract. In addition, the Texas statute states it is to be liberally construed to promote its underlying purposes. The Texas statute is not a prevailing party statute. It simply provides for a prevailing plaintiff; it does not provide for the recovery of fees for a prevailing defendant who defends against a claim.

Frivolous suits

Although only a handful of states allow recovery of attorneys' fees applicable to a broad range of civil suits, most states have enacted statutes that allow for recovery of attorneys' fees in frivolous suits. These statutes are intended to deter litigants from filing frivolous claims and punish those who do.

Florida allows a party to recover attorneys' fees as a sanction against the losing party and the losing party's attorney for maintaining a frivolous claim or defense. To recover fees, the party seeking to impose the sanction must prove that at the time of filing the suit or defense the claim lacked a basis in material facts or existing law.

In Georgia, a party can recover reasonable and necessary attorneys' fees if it is determined the opposing party has presented a frivolous claim or defense. A frivolous claim or defense includes a claim, defense or position that lacks substantial justification or is not made in good faith or is made with malice or a wrongful purpose. Georgia law also provides for an award of attorneys' fees and expenses of litigation against a party who has acted in bad faith, has been stubbornly litigious, or has caused unnecessary trouble and expense. Bad faith must be in the transaction from which the lawsuit arises. "Stubbornly litigious" and "unnecessary trouble and expense" require more than failure to pay a debt. If there is a bona fide controversy regarding liability or the amount of damages, attorneys' fees cannot be recovered. This is normally a matter for the jury to decide.

Just as many states have adopted statutes providing for recovery of attorneys' fees when a suit or defense is found to be frivolous or brought in bad faith, many states have enacted statutes allowing a plaintiff to recover attorneys' fees where the defendant has been found liable for intentional misrepresentation or fraud, particularly if the defendant is a commercial entity.

Claims against insurers

Quite a few states have enacted statutes that allow policyholders to recover attorneys' fees when the insured policyholder successfully prosecutes a lawsuit against his or her insurer seeking insurance coverage. Arkansas, Kansas, Maryland, Montana, South Carolina, Washington and West Virginia allow policyholders to recover attorneys' fees whenever the insurer has been found wrongfully to have denied coverage to its insured. Minnesota and New York also allow policyholders to recover attorneys' fees in certain circumstances when an insurer wrongfully denies coverage.

Indiana, Iowa, Maine, Mississippi, North Carolina, Pennsylvania, Utah, Vermont and Wisconsin allow insureds to recover attorneys' fees from their insurers but only if the insured can show the insurance carrier acted in bad faith in its denial or handling of the claim. Alabama, California, Kentucky, Louisiana, Michigan, New Mexico and Tennessee adhere to the American rule that each party is responsible for its attorneys' fees even if there is evidence the insurer acted in bad faith.

AAA rules

You also should be aware the Construction Industry Arbitration Rules of the American Arbitration Association (AAA) may provide an avenue to recover attorneys' fees and expose you to liability for the other party's attorney's fees.

The 2015 decision of the Missouri Court of Appeals, Eastern District, in the case of City of Chesterfield v. Frederich Construction Inc., is illustrative.

In the case, Frederich Construction Inc. (FCI), Labadie, Mo., was the general contractor on two construction projects for the city of Chesterfield, Mo. The contracts between FCI and the city incorporated AAA's Construction Industry Arbitration Rules. Disputes arose between the parties. FCI filed a demand for arbitration pursuant to the arbitration provision in the parties' contracts and requested the award include attorneys' fees.

An arbitration proceeding was conducted in accordance with AAA rules. The arbitrators found in favor of FCI on both contracts and awarded attorneys' fees to FCI of $50,000 on the first contract and $279,037 on the second contract. The city appealed the arbitrators' $279,037 award on the grounds the arbitrators exceeded their authority by awarding attorneys' fees because, as the arbitrators noted in their award, neither the contract between the city and FCI nor a statute authorized either party to recover attorneys' fees, and there were no special circumstances that would justify an award of attorneys' fees.

Exceeding authority is one of the few grounds upon which an arbitration award can be successfully appealed. The city filed its appeal of FCI's recovery of attorneys' fees in the Circuit Court of St. Louis County. The circuit court judge confirmed the arbitrators' award. Then, the city appealed to the Missouri Court of Appeals, which again confirmed the award based on AAA's Construction Industry Arbitration Rules and the arbitration demands filed by the parties.

Rule 45 of the AAA's rules states an arbitrator's award may include an award of attorneys' fees if all parties have requested such an award. There was no disputing FCI had requested the arbitrators to award attorneys' fees. The city contended it had not. However, the arbitrators and the Missouri Court of Appeals found the city had twice requested attorneys' fees: in the city's answer to FCI's demand and in a counterclaim filed by the city. In these pleadings, the city requested FCI's demand be denied and the city be granted the relief sought in its counterclaim, including attorneys' fees.

The city argued on appeal that its request for relief was "merely boilerplate" and did not constitute a request for attorneys' fees under Rule 45. The city also argued it did not request payment for attorneys' fees in response to a scheduling and procedure order issued by the arbitrators stating any party seeking an award of attorneys' fees or costs following an interim award make that request within 10 days of issuance of the interim award.

Because the underlying contract between FCI and the city incorporated AAA rules and the city included a request for attorneys' fees, the arbitrators awarded attorneys' fees to FCI. The Missouri Court of Appeals rejected the city's appeal because it was within the scope of the arbitrator's authority to award attorneys' fees and it was for the arbitrators and not the courts to determine what constitutes a request under AAA's rules. Nevertheless, the Missouri Court of Appeals went on to state it agreed with the arbitrators' decision and rejected the city's argument that its requests for fees were merely boilerplate. Therefore, FCI was able to recover its attorney's fees.

If you don't want to risk paying another party's attorney's fees in return for potentially recovering your own attorney's fees, make sure your attorney does not include a request for attorney's fees when filing or responding to a demand for arbitration.

Offers of judgment

Even if there is no contract provision providing for recovery of attorneys' fees or a statute that allows for recovery of attorneys' fees, you still might be able to recover attorneys' fees or be liable for attorneys' fees in a few states that have an offer of judgment statute. These statutes are intended to promote a settlement before a trial or final adjudication on the issues in dispute. Using this procedure, one party makes a settlement offer, or offer of judgment, to the other party. If the offer of judgment is not accepted and the ultimate recovery is less than the settlement offer, the party that made the offer is entitled to recover its reasonable attorneys' fees from the opposing party who may even have won the case but did not recover more than the rejected prior offer of judgment.

For example, in Arizona, if a party offers a settlement that is rejected and the other side later obtains a judgment that is less than the settlement offer, the losing party would be considered the prevailing party for purposes of being able to recover its attorneys' fees. If a written settlement offer is rejected and the judgment finally obtained is equal to or more favorable to the offeror than an offer made in writing to settle any contested action arising out of a contract, the offeror is deemed to be the successful party from the date of the offer and the court may award the successful party reasonable attorneys' fees.

In Florida, if a defendant makes an offer of judgment to the plaintiff and the plaintiff rejects the offer, the defendant can recover attorneys' fees if either the defendant prevails in the suit or if the judgment awarded to the plaintiff is 25 percent less than the offer the defendant made. Conversely, a plaintiff in Florida can recover attorneys' fees if the plaintiff makes an offer of judgment to the defendant that the defendant rejects and, at trial, the plaintiff prevails and is awarded a judgment at least 25 percent higher than the plaintiff's settlement offer.

Georgia has an offer of judgment statute that is similar to the Florida statute but applies only to tort suits. Nevada also has an offer of judgment statute that includes recovery of attorneys' fees. Many other states have an offer of judgment procedure that provides for the recovery of litigation costs, but most states do not include attorneys' fees as part of the allowed recovery of costs.

The U.S. government

If you are involved in a contract dispute with a federal government agency or have been wrongfully cited by a federal government agency, there is a possibility you might be able to obtain reimbursement of your legal fees if you prevail and can show there was scant justification for the government's position.

The Equal Access to Justice Act permits a prevailing party in a civil suit brought by or against the U.S. to recover its attorneys' fees and costs if the government's position was not "substantially justified." The Equal Access to Justice Act provides for a mandatory fee award the court must provide to the prevailing party if the government cannot demonstrate the position it took in the matter was either substantially justified or special circumstances make an award unjust. It is the government's burden to prove its position was substantially justified.

Be aware there are numerous federal laws, primarily with regard to employment matters, that provide for the plaintiff to recover attorneys' fees if the employer is found to have violated federal law. Title VII of the Civil Rights Act banning discrimination, the Federal Labor Standards Act dealing with wage and hour issues, Americans with Disabilities Act, and Family Medical Leave Act all provide for an award of attorneys' fees to the successful plaintiff.

Weigh the costs

The expense of litigating or arbitrating a dispute is a significant factor when determining a legal contest or settling a construction dispute. As with other issues, contract terms pertaining to recovery of attorneys' fees should be carefully considered during contract negotiations. You want to be sure you do not agree to be liable for another party's legal fees unless you, at least, have the corresponding right to recover attorneys' fees if you are the prevailing party. The successful party in a normal breach-of-contract suit only can recover attorneys' fees if the contract so provides. However, you should be mindful of AAA rules and check statutes and rules of the state where the dispute is being adjudicated to see whether there is an avenue that would allow recovery of attorneys' fees.

Stephen M. Phillips is a senior partner with Atlanta-based law firm Hendrick Phillips Salzman & Siegel P.C.


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