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Home | Columnists | Legal | Legal - Emerging risk - Recovery of attorney’s fees in construction disputes: The devil is in the details

Legal - Emerging risk - Recovery of attorney’s fees in construction disputes: The devil is in the details

image West W. Winter, Attorney The Winter Law Firm, PLLC San Antonio TX

SAN ANTONIO - The long held general rule of law in Texas regarding the recovery of attorney’s fees is that attorney’s fees paid to prosecute or defend a lawsuit cannot be recovered in that suit absent a statute or contract that allows for their recovery. For more than 100 years, the Courts of our great state have held that they do not have the authority to require a losing party to pay the prevailing party’s fees unless a statute or contract provides for an award of attorney’s fees. This established rule, that a party is ordinarily required to bear its own attorney’s fees, is known as the “American Rule”.


Statutes Allowing for the Recovery of Attorney’s Fees

    In the construction law context, some of the Texas statutes utilized by litigants to avoid the impact of the American Rule and recover attorney’s fees include:   the Prompt Pay Act in Chapter 28 of the Texas Property Code (providing that the court may award costs and reasonable attorney’s fees as the court determines equitable and just); Section 53.156 of the Texas Property Code (providing that in certain proceedings involving lien and bond claims, the court shall award costs and reasonable attorney’s fees as are equitable and just); and very often, Chapter 38 of the Texas Civil Practice & Remedies Code (providing for the recovery of attorney’s fees, in addition to the amount of the claim and costs, from an individual or corporation if the claim is for, among other types of claims, rendered services, performed labor, furnished material, or an oral or written contract).

Details, Details

    Since construction disputes often involve competing breach of contract claims, it would be a simple conclusion to draw that Chapter 38 of the Texas Civil Practice & Remedies Code allows the prevailing party to recover its attorney’s fees from the losing party.  And there is a common misconception that Chapter 38 allows all litigants to recover fees whenever the claims involve breaches of contract. Unfortunately, the courts have strictly construed the specific language within the statute in such a manner so as to strictly limit its applicability to claims against “individuals” and “corporations.”  As such, many Texas courts hold that Chapter 38 does not allow a prevailing party to recover attorney’s fees against other common entity forms such as partnerships and limited liability companies.  The illogical result is that in a lawsuit between an LLC and a corporation where both sides allege material breaches of contract and the sole basis for recovery of fees is Chapter 38, the LLC would be legally able to recover its attorney’s fees if it prevailed against the corporation.  However, in this same example, the corporation would not be able to recover its attorney’s fees if it prevailed against the LLC.

Pending Legislation May Provide Relief

    Pending legislation set forth in House Bill 790 seeks to amend and clarify Chapter 38 by making it broadly applicable to claims against state agencies, political subdivisions, and all “organizations” as that term is defined in the Business Organizations Code.  This legislation, if enacted into law, would expand the application of Chapter 38 and allow litigants to also recover attorney’s fees in breach of contract claims against partnerships, limited liability companies, trusts, and other types of business organizations.  As of the writing of this article, House Bill 790 remains pending in committee.

Texas Supreme Court Decision Negates Attorney’s Fees for Trust Fund Claims

    Commonly known as the Texas Construction Trust Fund Act, Chapter 162 of the Texas Property Code mandates that construction payments and loan receipts are trust funds if they are made to or borrowed by a contractor or subcontractor under a construction contract.  Pursuant to the express provisions of the Trust Fund Act, those who furnish labor or material for the construction of the improvement are the beneficiaries of the trust funds and have a civil cause of action against a trustee who misapplies the trust funds.  Whether a party to a lawsuit can recover attorney’s fees under the Trust Fund Act has been an open question.

    But last year, the Texas Supreme Court in Dudley Construction, Ltd. v. ACT Pipe and Supply, Inc., settled the open question when it held that attorney’s fees are not recoverable under either the Trust Fund Act itself or Chapter 38, when the claim is pursuant to the Trust Fund Act.  Significantly, Dudley Construction, Ltd. v. ACT Pipe and Supply, Inc. involved a claim amount of $143,714.19 and an additional attorney’s fees claim of $131,823.99.  The Court held that the Trust Fund Act does not provide for the recovery of attorney’s fees, and Chapter 38 does not list the Trust Fund Act as a cause of action to which it applies.  The Supreme Court accordingly reversed the $131,823.99 in attorney’s fees awarded for ACT’s Trust Fund Act claim.

Lessons Learned

    Since attorney’s fees in construction disputes are typically significant and can equal or even exceed the amount in controversy, litigants and their attorneys should fully analyze the causes of action and the types of entities involved to ensure that they have a right under prevailing law to recover attorney’s fees.  Furthermore, it would be very wise to negotiate all contracts on the front end to mandate an award of attorney’s fees and expenses to your business if it is the prevailing party in any dispute.  Ensuring that your business is entitled to an award of attorney’s fees by contract is an exception to the American Rule which should provide protection without regard to applicable statutes or organization type.

    West W. Winter, a LEED Green Associate, serves on the board of the Construction Law Section of the San Antonio Bar Association and has been listed as one of the Best Lawyers in San Antonio for Construction Litigation.  The Winter Law Firm represents general contractors, subcontractors, and suppliers, in all phases of the construction process, from contract formation through dispute resolution, litigation, and collection.  West may be reached via email:  west@thewinterlawfirm.com.

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