Attorneys’ Fee Provisions in Construction Contracts: Blessing or Curse?

This article provides an overview of the pluses and minuses of including an attorneys’ fees provision in construction contracts. Should a dispute between the contract’s parties end up in litigation or arbitration, an attorneys’ fees provision dictates that the prevailing party also be compensated for attorneys’ fees incurred. The various standard-form construction contracts handle this issue in different ways. Standard-form construction contracts are also almost universally modified and so there is really no standard “standard form.” Non-standard forms also deal with this issue in a variety of ways. While every project has its unique aspects, consideration should be given when preparing a construction contract on how to handle the cost of legal fees in the event something doesn’t go right on the project and a dispute ensues.

The American Rule

Parties are often surprised to learn that when a dispute arises, the general rule in the United States is that each side must pay their own attorneys’ fees. There are exceptions, however. For example, in Wisconsin, consumer protection laws can provide attorneys’ fees for the consumer if the consumer wins. So for residential remodel projects, ATCP 110 allows for attorneys’ fees to the homeowner if the contractor violated ATCP 110. In other states that have a prompt payment act, if an owner doesn’t pay the contractor on time, the owner may have to pay the contractor’s attorneys’ fees if the contractor wins the case for late payment. Aside from these kinds of laws, if the contract doesn’t provide for attorneys’ fees, the parties to the dispute have to go Dutch.

Fee Provisions in Construction Contracts

The three most popular form documents are AIA, EJCDC, and ConsensusDocs. AIA and ConsensusDocs forms are typically used for vertical construction, such as apartments, hotels, or office buildings. EJCDC documents are typically used for engineered-based construction, such as road building, or wastewater treatment plants. Unaltered AIA and EJCDC documents do not provide for attorneys’ fees to the winner of a dispute. Again, they may be altered so you should read these documents from cover to cover and not assume anything. Unaltered ConsensusDocs provide that the “prevailing” party gets reasonable attorneys’ fees. You can delete this clause as part of your review.

Some contracts only provide for attorneys’ fees for one party and not the other. So, for example, a General Contractor may say it gets attorneys’ fees in a dispute, but the subcontractor, even if it wins, doesn’t get any. Tails I win, heads you lose. These types of one-sided fee provisions are generally enforceable, although some arbitrators or courts may frown on awarding one side legal fees if the clause was one-sided and not mutual.

The question of who is a prevailing party is complicated whenever there are competing claims. Some courts and arbitrators will apportion legal fees based on the percentage of victory, while others will allow a party to recover all attorneys’ fees when that party substantially prevailed on its claims. Sometimes both parties can prevail, and so there can be cross awards of attorneys’ fees that may partially cancel each other out.

To Include an Attorneys’ Fee Clause or Not

The vast majority of construction disputes get resolved without getting attorneys involved or through a voluntary settlement. In these cases, the question of who is a prevailing party is never decided. If there is an attorneys’ fee clause for a prevailing party, that may impact the amount of the settlement to one party or another, as a potential attorneys’ fee award may be factored into the claim amount.

Generally speaking, while it is nice to get your attorneys’ fees if you win a dispute, the inclusion of an attorneys’ fee provision can mean that simple disputes escalate quickly and the delta between what the parties view as the difference in value of their respective claims may continually widen. In other words, a $100,000 dispute without a potential for an attorneys’ fee award might now be a $150,000 dispute or more. So, ironically, there are times when the mere presence of a prevailing party clause may make settlement of a dispute impossible and force parties into an all or none situation. Or one party may end up paying more than the claim is worth because of the fear of having to pay the other side’s attorneys’ fees. For this reason, many times it is more prudent not to include a provision for an attorneys’ fee award in a construction contract.

Bottom Line

Many clauses in construction contracts can end up being a double-edged sword. An attorneys’ fee provision is one such clause. If you are an owner, contractor, subcontractor, or design professional, you need to know what you are signing before you sign. Also, you always should have a good and fair construction contract in place before you start any construction project.