Attorneys Fee and Cost Provisions In Construction Contracts: Part 1 - Who Is The Prevailing Party?
Construction contracts and architects agreement often include attorney fee and cost provisions. These are those sections saying that if there is a dispute, the losing side must pay for the winning side's attorneys fees and costs. Sounds pretty simple. But it isn't. There's a lot of before getting the other side to pay for your attorneys fees and costs. Most hurdles fall into one of the following categories:
The American Rule
Traditionally, the "default rule" in the United States is that the loser of a lawsuit does not have to pay the winner's attorneys fees or costs. For over a century, lawyers and judges have called this the "American Rule". But in other Anglo-American countries (e.g., Great Britain, Australia), the default rule is that the loser does pay the winner's attorneys fees and costs. Lawyers and judges call this the "British Rule".
Like nearly all rules, the American Rule has exceptions. When one of the exceptions applies, the loser must pay the winner's attorneys fees and costs. So what are the exceptions? The one's you see most often are.....
Deciding Who Is The Winner
F&C provisions usually say that if there's a dispute, the prevailing party (law talk for winner) is entitled to recover their reasonable attorneys fees and costs from the non-prevailing party (law talk for loser). By the way for ease of reference, when I mention "dispute" here, I mean any disagreement or confrontation related to your contract, including arbitration or a lawsuit. But you must be careful, your contract may not define dispute the same way.
If the world of construction dispute were simple, who wins and who loses would be easy to identify. It would be like an hour-long legal drama on network TV where, between the last commercial and the trailer for next week's episode, the bad guy confesses on the witness stand and the jury returns a verdict for the good guys. Real construction disputes don't end like that.
Most construction disputes are more like 16th and 17th Century European warfare. Each side wins some battles, each side loses some battles. There is no decisive and resounding victory. No surrender on the Battleship Missouri. Instead, they're long, protracted, and expensive. One side wins some, but not all, of their claims. The other side wins some, but not all, of their counterclaims. When this happens, it's tough to decide who's the winner and who is the loser. If it's close, deciding who won and who lost the original dispute becomes a new dispute in an already protracted struggle.
Trying to predict how a judge (this includes arbitrators too) will decide is like trying to pick the bronze medal in women's figure skating two Winter Olympics from now. For years judges have articulated standards for deciding who is the prevailing party when each side got a partial victory. Most of the time they choose side who won more of what they asked for. But the only certainty is uncertainty. That usually means spending money and time to get a decision, and then spending more money and more time on at least one appeal of that decision.
I've seen contracts that try to reduce the uncertainty in deciding who's the prevailing party. One had a provision saying that if you're asking for money damages, you must get at least 75% of your original request to qualify as the prevailing party. I think terms like this can help. They don't solve all of the prevailing party identification problems, and some judges are not going to feel compelled to apply them. But they can give a judge a better starting point and reduce the uncertainty. They also encourage settlement. When you consider that a marginal victory gets you a bill for your opponent's fees and costs, settlement might have more appeal. The other side may see it the same way too.
Upcoming Posts
In the next post we'll talk about what's included in "attorney's fees and costs" and how you can change that in your contract.
Post-Script
By the way, here's how 16th and 17th Century European wars usually ended. Each side borrowed and spent themselves to the brink of, or actually into, bankruptcy with little to show for it. Then one of them would run completely out of money and their lenders would lend no more. So they'd sue for peace and agree to a treaty ending the war. Of course after not too many years they'd refill their coffers, re-establish their credit and the wars would start again. Been through a few construction disputes? Sound familiar?
- Deciding who is the winner.
- Deciding how much should the winner get from the loser.
The American Rule
Traditionally, the "default rule" in the United States is that the loser of a lawsuit does not have to pay the winner's attorneys fees or costs. For over a century, lawyers and judges have called this the "American Rule". But in other Anglo-American countries (e.g., Great Britain, Australia), the default rule is that the loser does pay the winner's attorneys fees and costs. Lawyers and judges call this the "British Rule".
Like nearly all rules, the American Rule has exceptions. When one of the exceptions applies, the loser must pay the winner's attorneys fees and costs. So what are the exceptions? The one's you see most often are.....
- The contract exception - where the winner and loser are parties to a contract that says the loser must pay.
- The statute exception - where a statute says the loser must pay. Classic examples are antitrust laws, like Section 15 of the Clayton Act.
Deciding Who Is The Winner
F&C provisions usually say that if there's a dispute, the prevailing party (law talk for winner) is entitled to recover their reasonable attorneys fees and costs from the non-prevailing party (law talk for loser). By the way for ease of reference, when I mention "dispute" here, I mean any disagreement or confrontation related to your contract, including arbitration or a lawsuit. But you must be careful, your contract may not define dispute the same way.
If the world of construction dispute were simple, who wins and who loses would be easy to identify. It would be like an hour-long legal drama on network TV where, between the last commercial and the trailer for next week's episode, the bad guy confesses on the witness stand and the jury returns a verdict for the good guys. Real construction disputes don't end like that.
Most construction disputes are more like 16th and 17th Century European warfare. Each side wins some battles, each side loses some battles. There is no decisive and resounding victory. No surrender on the Battleship Missouri. Instead, they're long, protracted, and expensive. One side wins some, but not all, of their claims. The other side wins some, but not all, of their counterclaims. When this happens, it's tough to decide who's the winner and who is the loser. If it's close, deciding who won and who lost the original dispute becomes a new dispute in an already protracted struggle.
Trying to predict how a judge (this includes arbitrators too) will decide is like trying to pick the bronze medal in women's figure skating two Winter Olympics from now. For years judges have articulated standards for deciding who is the prevailing party when each side got a partial victory. Most of the time they choose side who won more of what they asked for. But the only certainty is uncertainty. That usually means spending money and time to get a decision, and then spending more money and more time on at least one appeal of that decision.
I've seen contracts that try to reduce the uncertainty in deciding who's the prevailing party. One had a provision saying that if you're asking for money damages, you must get at least 75% of your original request to qualify as the prevailing party. I think terms like this can help. They don't solve all of the prevailing party identification problems, and some judges are not going to feel compelled to apply them. But they can give a judge a better starting point and reduce the uncertainty. They also encourage settlement. When you consider that a marginal victory gets you a bill for your opponent's fees and costs, settlement might have more appeal. The other side may see it the same way too.
Upcoming Posts
In the next post we'll talk about what's included in "attorney's fees and costs" and how you can change that in your contract.
Post-Script
By the way, here's how 16th and 17th Century European wars usually ended. Each side borrowed and spent themselves to the brink of, or actually into, bankruptcy with little to show for it. Then one of them would run completely out of money and their lenders would lend no more. So they'd sue for peace and agree to a treaty ending the war. Of course after not too many years they'd refill their coffers, re-establish their credit and the wars would start again. Been through a few construction disputes? Sound familiar?
Construction Law Today is a legal blog about construction contracts, disputes, finance, and the people whose job it is to deal with them.
