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The Importance of Prevailing Party Attorneys’ Fees Provisions in Construction Contracts

Going to court can be costly.  Everyone knows that!  Wouldn’t it be nice if the winning party could always recover its legal fees?  In the United Kingdom and all jurisdictions that follow the so-called “English” or “British Rule,” the winning party in a lawsuit automatically is awarded its attorneys’ fees.  Courts in the United States, however, have traditionally followed the “American Rule,” which dictates that each party is required to pay its own attorneys’ fees, no matter who wins.

Over time, American courts began to recognize some limited exceptions to the “American Rule.”  The first such exception was for cases in which a state or federal statute allowed the winner to recover fees.  For example, under the federal Civil Rights Act, prevailing civil rights litigants are entitled to recover attorneys’ fees .  The other exception is more relevant for those involved in the construction industry: the second exception to the “American Rule” exists where a contract allows a prevailing party in a lawsuit to recover its attorneys’ fees. 

This second exception can be a powerful tool for a construction business, protecting the rights of the side that did not do anything wrong, and discouraging others from filing “frivolous” or “vexatious” lawsuits.  For many years, however, many courts—including Virginia state courts—typically applied a percentage (anywhere from 10 to 25 percent) to the amount at issue in order to determine what constituted a “reasonable” amount for an award of attorneys’ fees (or at least a ceiling on such an award).  In larger cases, where the amount at issue was in the hundreds of thousands or even millions of dollars, the “percentage” or “formula” approach was generally adequate to cover what a litigant might actually be required to spend to win the case.  But what about the more modest cases, where perhaps $20,000 or $25,000 is at issue?  A “percentage” award might give the winning side a “hollow” victory, in which the winner had to spend a disproportionate amount to enforce its rights.

Earlier this year, this unfortunate  circumstance began to change in Virginia.  In the case of Lambert v. Sea Oats Condo Association, the Supreme Court of Virginia examined a case in which a condominium owner obtained a $500 judgment against her condo association for the association’s failure to repair an exterior door to her condo.  The plaintiff sought attorneys’ fees (under the Virginia Condominium Act) in the amount of $8,232, to which the Condo Association objected on the basis that the attorneys’ fees were 16 times the amount of the judgment. 

Under prior Virginia law, the attorneys’ fees would likely have been reduced on the basis of being disproportionally greater than the amount of the judgment.  In this case, however, the Supreme Court of Virginia took a different approach, stating that merely applying a ratio or percentage to the damage award would not always guarantee a reasonable award of attorneys’ fees.  The Court further stated that Virginia trial courts could no longer use the amount of damages sought and awarded as a limit—or ceiling—beyond which no attorneys’ fees could be awarded.  In summary, the Court said that a trial court “cannot dismiss out of hand the costs of litigation inflicted on the prevailing party by the losing party’s insistence on its losing argument, based solely on the dollar value of the claim.”

Later in the year —in the first Virginia trial court application of the new rule announced by the Virginia Supreme Court in the Lambert case—the Hirschler Fleischer Construction Team obtained an award of attorneys’ fees of more than $117,000 for a Hanover County property owner’s association, a case in which the damages sought at trial were less than $60,000.  Following a two-day jury trial in that case in February, a Hanover County jury awarded the plaintiff owner’s association compensatory damages for unpaid property owner’s association assessments.  Judge J. Overton Harris of the Hanover County Circuit Court then ordered a separate evidentiary hearing on the association’s claim for attorneys’ fees.  In July, after hearing all of the evidence as to attorneys’ fees, Judge Harris awarded the property owner’s association $117,155.81 in attorneys’ fees, relying on the Virginia Supreme Court’s new guidance as announced in the Lambert case.

We believe that these are positive developments for Virginia construction professionals with legitimate claims or legal defenses.  A well-drafted and enforceable “prevailing party” attorneys’ fees contract clause is now more valuable and important than ever, and we strongly recommend that all construction and supply contracts contain such a provision. 

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