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Legal - Rethinking the recovery of attorney’s fees as a means to save costs

image R. Carson Fisk, Shareholder, Andrews Myers, P.C., Austin, TX

AUSTIN - In a construction dispute, settlement often makes a lot of sense based on fundamental matters such as certainty of outcome and conservation of time and cost. In fact, as a matter of public policy, the State of Texas encourages “the peaceable resolution of disputes” as well as “the early settlement of pending litigation.” But in many construction disputes—particularly those involving a couple hundred thousand dollars or less—the recovery of attorneys’ fees can be a major factor as to whether settlement is realistically achievable.

    This is generally because in litigation or arbitration, the legal costs can quickly add up and, in some instances, become a disproportionately large number when compared to the actual principal amount in dispute. It is not uncommon for parties to spend $20,000 or more on attorneys for a $50,000-$100,000 dispute simply to reach a point where settlement negotiations might be productive based on the merits of the parties’ positions.  This has the tendency to entrench parties in their positions given the need to recover attorneys’ fees’ in order to “be made whole.” So while settlement often makes sense—so much so that it is reflected in state-policy as codified by statute—does the ability to recover attorneys’ fees promote settlement or hinder it?
    In the American judicial system, the recovery of attorneys’ fees in litigation is generally governed by what is known as the “American Rule.” Under this rule, each party bears its own attorneys’ fees, meaning that a party cannot recover such fees from the other party even if it prevails. The rule applies unless there is a statute authorizing the recovery of attorneys’ fees or such recovery is permitted by the terms of a contract. Thus, in a straightforward negligence case (e.g., a case involving a slip-and-fall, car accident, etc.), a party does not have the right to recover attorneys’ fees from the other party. However, in the construction context, a party often does have the right to recover attorneys’ fees. This is because multiple statutes apply—sometimes uniquely—to construction-related claims that permit the recovery of attorneys’ fees. For example, statutes addressing mechanic’s and materialman’s liens, prompt payment, breach of contract, and the declaration of contractual rights all authorize a party to recover attorneys’ fees under certain circumstances. Additionally, many construction-related contracts provide the winning party the right to recover attorneys’ fees from the losing party.
    With the recovery of attorneys’ fees routinely being an issue in construction disputes, the issue turns back to whether such a right of recovery is a help or hindrance to settlement.
    Under one theory, the ability to recover attorneys’ fees promotes settlement. The focus of risk assessment is on the potential for an expanded negative result—the fact that the losing party might not only have to pay an adverse judgment or arbitration award, but also the attorneys’ fees incurred by the winning party. This increased risk motivates parties to take a more reasonable position in settlement negotiations. This often emboldens a party with the stronger position (or perceived stronger position). But there is risk even for the winning party. Often the fact finder is not necessarily obligated to award the full amount of attorneys’ fees incurred, but rather what might be subjectively considered fair, just, reasonable, necessary, or a combination of these. So, while a winning party may have incurred $100,000 in attorneys’ fees, it may ultimately be awarded much less. This, of course, makes a “win” less of one. And, as is often the case, each side may view itself as the party with the stronger position, presenting additional challenges.
    Under another theory, the ability to recover attorneys’ fees hinders settlement. The focus of risk assessment is on the merits of the dispute, without attention to added-on costs such as legal expenses. If this approach is preferred, often parties generally must contractually agree that neither side has the right to recover attorneys’ fees or, in arbitration, that the arbitrator does not have the power to award attorneys’ fees. This approach can be particularly effective for early stage resolution of “smaller” disputes, such as those involving a couple hundred thousand dollars or less. It is at the early stage of a dispute where the parties have the best chance at a cost-saving resolution, avoiding the steep and ongoing legal costs and associated commitments of time (generally resulting in additional, less tangible losses to the parties). But it is also the point in time where the parties know the least about their respective strengths and weaknesses in a case. Such information can be obtained, but only after spending money on attorneys’ fees—such fees not being recoverable. Thus, there is an increased incentive to settle earlier than later to avoid sunk costs. Conversely, parties may be inclined to adopt harsher or unreasonable approaches knowing that their exposure to attorneys’ fees is lessened or non-existent.
    Neither approach is perfect under all scenarios, and unfortunately a decision on which approach to adopt generally has to be made well before any dispute is at hand. But owners, architects, engineers, contractors, subcontractors, and suppliers who leave the recovery of attorneys’ fees to chance are doing themselves a disservice. Thought should be given to the philosophy underlying any given approach, whether it be aggressive recovery or pragmatic resolution. Certainly state policy supports early amicable settlement, but the reality is that parties often feel strongly that the party who wins should recover all costs, including attorneys’ fees, from the party who loses. These theories and approaches should be considered, while keeping a party’s principles in mind, when drafting agreements.

R. Carson Fisk is a construction attorney, mediator, and arbitrator and shareholder at Andrews Myers P.C. in Austin, Texas. He may be reached at cfisk@andrewsmyers.com.

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