As published on the construction law blog Construction Law Musings - Richmond, VA
If you read Construction Law Musings regularly like I do, you’re already familiar with the concept of the construction contract as “king.” As a construction practitioner, I spend a lot of time reviewing construction contracts and talking to contractors, both large and small, about issues to be addressed in their contracts. One issue near and dear to my own heart is whether the contract will provide for an award of attorneys’ fees to the prevailing party in a contract dispute. Too often, I find that my potential litigation clients neglected to address that issue in their contracts, and they pay for that mistake once things go south.
Most contractors understand that their general liability insurer will pay an attorney to defend them against third party lawsuits, and they would not dream of undertaking a project without that protection. The reality, however, is that those types of suits are relatively uncommon among construction disputes. Much more common are disputes over payment, delays, changes, and the like. It never ceases to amaze me how many contractors fail to address litigation costs for these relatively routine disputes before they arise.
The default rule in this country is that each party to a dispute is responsible for paying its own attorneys’ fees unless a specific statute or contract provides otherwise. Construction disputes are typically witness-intensive, document-intensive, and technical in nature. As a result, construction litigation can be far more expensive than many other types of disputes. It is crucial for the parties to a construction contract to explicitly address attorneys’ fees for disputes during the negotiation of the contract, regardless of the size or scope of the project or the type of contract employed.
Contractors should not assume that they are covered by using form contracts. For example, the AIA Form A201-2007 General Conditions, the backbone for all AIA form agreements between owners and contractors, omits any reference to attorneys’ fees at all. So did earlier versions of the A201. On the other hand, after 2011 revisions, the General Terms and Conditions of the ConsensusDOCS core contract documents now provide for the prevailing party to recover its attorneys’ fees in dispute resolution proceedings.
Likewise, when a contractor does negotiate up front for an attorney fee provision, it should always consult with an attorney before assuming that the language of the attorney fee provision will be given the meaning the contractor intends. The effect of a provision may not always be easy to determine. Under North Carolina law, for example, the availability and amount of a contractual attorney fee award can vary wildly depending on the specific fee provision and type of contract at issue.
North Carolina courts can award litigants their attorneys’ fees only where a statute expressly provides that right, regardless of what the parties may have contractually agreed to do. Until recently North Carolina had no law expressly authorizing contractual attorney fee provisions in most business contracts. As a result, the enforceability of attorney fee provisions in North Carolina construction contracts has remained somewhat open to interpretation.
In the past, North Carolinas’ courts had to pigeonhole construction contracts into the statute authorizing fee awards in promissory notes and other loan documents as an “evidence of indebtedness.” The problem with that approach has been that attorney fee awards under this statute are capped at 15% of the outstanding balance owed, so a party owed $100,000 under a construction contract could receive a fee award of, at most, $15,000—hardly enough to carry him through the vast majority of construction litigation cases.
As of October 1, 2011, a brand new North Carolina statute now expressly authorizes attorney fee provisions in business contracts governed by state law. The new statute, N.C.G.S. 6-21.6, significantly expands the availability of attorney fee awards, but is not without its own limitations. Importantly, under the new law the fee provision must be reciprocal—providing both parties with the right to recover attorneys’ fees—and all parties to the contract must sign the contract “by hand.” If those requirements are met, the court or arbitrator may now award reasonable attorneys’ fees in accordance with the terms of the contract. Attorney fee awards under the new statute are not capped at 15%. Instead, where the proceeding is primarily for the recovery of money damages, the plaintiff’s fee award cannot exceed the money damages awarded, and the defendant’s fee award cannot exceed the amount in dispute.
While North Carolina’s new fee statute expands the enforceability of attorney fee provisions in construction contracts, generally, that benefit does not extend uniformly throughout the industry. By its terms, N.C.G.S. 6-21.6 does not apply to consumer contracts and thus does not authorize attorney fee provisions in consumer residential construction contracts. Fee awards in that context are still capped at 15% of the outstanding balance owed under the older statute. That doesn’t provide much relief for the residential contractor forced into litigation with a homeowner.
The bottom line for recovering attorneys’ fees under a contractual fee provision in North Carolina construction contracts is this:
- In commercial construction contracts containing reciprocal fee provisions and signed by hand, the prevailing party may recover all of its attorneys’ fees up to the amount of the award for the plaintiff, or the amount in dispute for the defendant;
- In all other commercial construction contracts, the prevailing party may be able to recover its attorneys’ fees up to 15% of the amount owed; and
- In all consumer residential construction contracts, the prevailing party may recover its attorneys’ fees up to 15% of the amount owed under N.C.G.S. 6-21.2.
At the end of the day, there simply is no one size fits all approach to attorney fee provisions in construction contracts. Whether you are a contractor in North Carolina or some other state, it is critically important to address attorneys’ fees at the beginning of your projects. There is nothing that makes my clients happier than forcing their opponent to pay my firm’s fees. Spending an hour with your attorney today might just help you avoid paying for many more hours a year from now. That’s money well spent.