If a Contractor Obtains a Successful Ruling in a Lawsuit, It Gets Its Attorney’s Fees…Right?

By Anthony D. Whitley

Whitley is an attorney at the Dallas office of Ford Nassen & Baldwin PC, www.fordnassen.com.

Jurisdictions across the country generally follow two theories when it comes to the recovery of attorney’s fees in litigation. Most follow what is known as the “American Rule,” which requires each party to bear its own attorney’s fees in prosecuting or defending a lawsuit. Despite the apparent harshness of the American Rule, Texas litigants actually have it far better than litigants in most states. A few states, including Texas, have statutorily carved out exceptions to the American Rule by authorizing the recovery of attorney’s fees to the “prevailing party” bringing a breach of contract claim, a claim under prompt payment statutes, a suit to foreclose a lien claim or an action to enforce a bond claim, among others.

The “Prevailing Party” Under Texas Law Chapter 38 of the Texas Civil Practice and Remedies Code (Chapter 38) provides that a prevailing party may recover attorney’s fees from an individual or corporation if it prevails on a breach of an oral or written contract claim. A prevailing party is the party that obtains a favorable ruling on its affirmative claim and its damages claim. For instance, if a general contractor sues for breach of contract and proves the other party breached the contract, but the contractor could not prove its entitlement to damages, the contractor may not recover attorney’s fees. Some courts may deny attorney’s fees if the prevailing party recovers a fraction of its damages or nominal damages but otherwise prevails on its liability claim. Recovery of attorney’s fees may be further complicated in circumstances where both parties to the contract and litigation prevail on different affirmative claims brought against the other. Because of such nuances, most attorneys will advise clients before the client decides to litigate that recovering attorney’s fees based on a statute alone is not guaranteed.

More importantly, even Texas prohibits a defendant from recovering attorney’s fees who simply defends against a plaintiff’s breach of contract claim without presenting its own affirmative claim for which attorney’s fees are recoverable (e.g. Chapter 38 or other statutes governing prompt payment, liens, bonds, etc.). If a defendant only defends itself against claims related to breach of contract, payment bonds, mechanic’s liens, prompt payment, construction trust fund, negligence or any other cause of action, the defendant may not recover its attorney’s fees even it obtains a favorable ruling in the litigation. Simply put, if a contractor, after receiving payment in full, is sued by an owner for a defect and successfully defends that suit in court, the contractor will not recover one penny of its attorney’s fees.

Contractual Provisions Offer Better Solution Relying solely on a statute will not afford the level of protection contractors need, especially if the contract is governed by the laws of a state other than Texas. To provide the best opportunity to recover attorney’s fees, contractors must ensure that their contracts are properly drafted providing for the recovery of attorney’s fees even in situations where the contractor only successfully defends a claim. The attorney’s fees provisions should also allow the contractor to recover its attorney’s fees in any situation in which the contractor must enforce, not just litigate, the terms of the governing contract. This is especially applicable in contracts with sub-tiers. Contractors and subcontractors alike, in their “downstream” agreements with sub-tiers, should insist on provisions in those agreements that allow them to offset attorney’s fees against any balance otherwise owed to the sub-tier. This becomes especially important in situations where the contractor or subcontractor must hire an attorney to assist it in providing cure notices and termination notices to a breaching sub-tier or remove lien claims filed on the project during construction. In some of those instances, the breaching sub-tier may cure and move on to complete its work. Without necessary contractual language and short of being a “prevailing party” in litigation contractors, and subcontractors, cannot otherwise invoke any “self-help” remedy to offset attorney’s fees against the sub-tier’s remaining balance.

Even in Texas, a contractor’s right to recover attorney’s fees is limited to a few instances absent additional contractual provisions expanding those rights. Outside of Texas, contractors face even less of a chance.