In the commercial world, risk management and cost-shifting are crucial considerations when any decision is being made. The economics of the deal matter. Companies breach contracts for a myriad of reasons. With the American legal regime, breach of contract is commonplace. When a company you contracted with breaches and won’t settle, naturally you want to run to the courthouse to get the benefit of your deal. After all, that is why you struck it. Legal counsel is a business cost, however, and that is something you, as a business decision-maker, need to factor in.
- Example: If the value of your contract you want to collect on is $50,000 but you’re going to have to pay your attorneys $80,000 to try the case, the decision to move forward with the suit is not economically feasible. Companies often have to weigh the potential cost of litigation against the likelihood and amount of a favorable verdict or settlement.
HOW TEXAS DEALS WITH BREACH OF CONTRACT
The good news is Texas has a particularly helpful law regarding breach of contract. As you may know, the general rule with most lawsuits for things like fender benders or even serious injuries is that you do not get to collect attorney’s fees from the other side. Luckily (and thankfully), under Chapter 38 of the Texas Civil Practices and Remedies Code, you can usually collect attorney’s fees from the other side in Texas when you sue for breach of contract.
To collect attorney’s fees in a breach of contract case, a few things have to happen.
- First, you have to “prevail” – i.e., win the case.
- Second, you have to win damages. This means either the court or the jury must award you some money other than the attorney’s fees.
- Finally, the amount of the attorney’s fees must be reasonable and necessary. There are certain technical legal factors dictating what is reasonable and necessary. Often times, attorneys will submit affidavits swearing that their fees are reasonable and necessary. Sometimes attorneys even take the stand to testify to their fees.
- Example revisited: Remember, you sued for breach of contract and won, but you would be in the red by $30,000 after paying your attorneys.
- This time, however, let’s apply Chapter 38. You would be $50,000 in the green because the $80,000 in attorney’s fees would be covered by the losing side. (Note: these dollars would actually increase in a real case to the extent you sought and won pre and post-judgment interest). The point here is that you got your bargain and your attorney got paid.
Keep in mind that your right to recover attorney’s fees for breach of contract against an individual or corporation is grounded in Texas law, independent of any contractual provision. As long as you sue for breach of contract, prevail and win damages at trial, and the fees are reasonable and necessary, the law independently permits you to collect attorney’s fees from the losing side.
THE BAD NEWS
- First, we mentioned only “individuals and corporations” because that’s what Chapter 38 expressly states. What about other entities, like LLCs and partnerships? Unfortunately, in 2014, a Houston Court of Appeals held that a limited liability partnership is neither a corporation nor an individual, meaning that Chapter 38 did not authorize a plaintiff to recover attorneys’ fees against it. See Fleming & Assocs. LLP v. Barton, No. 14-12-00582-CV, 2014 WL 783772 (Tex. App. – Houston [Fourteenth Dist.] Feb. 27, 2014, no pet. Post-Fleming, it is not clear what happens when you win a contract action against an LLC and seek attorneys’ fees under Chapter 38.
- Second, Chapter 38 requires you first win damages. But, what about those cases when what you are seeking is for the defendant to do or not do something rather than seeking an award of damages? If you relied on just Chapter 38, you’d bear all the legal expenses yourself, even if you won!
- Third, what if, when you present your claim for attorneys’ fees to the Court, the other side (who had been difficult and evasive all through the lawsuit, driving up costs in the process) claims that your actual incurred fees are not “reasonable” or “necessary”? As you may imagine, that argument gets raised often.
FEE RECOVERY CLAUSES
Fortunately, each of these issues have a solution. Experienced counsel know that the key to fee recovery can have its roots in the contract drafting stage, not just after the problem arises. A contract that has an appropriately-worded fee recovery clause could allow you to:
- recover against any entity, irrespective of its technical legal form,
- will let you seek fees even if you are seeking specific performance or injunction rather than non-monetary relief, and
- will let you recover actual fees incurred rather than a “Monday-morning-quarterback” review of the time spent and fees incurred.
Not all such recovery clauses are appropriate in all transactions, but an experienced business law firm would discuss the options with you and make recommendations with the above in mind.
For more information on the collection of attorney’s fees in a breach of contract case, contact our business lawyers at the Vethan Law Firm.
