Construction Law Alert: North Carolina to Enforce Attorney Fees Clauses

by Nexsen Pruet, PLLC
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Mabe, John[author: John Mabe]

For years, North Carolina construction contracts have included some form of attorney fees provision. The clauses often provided leverage to parties who wanted to "up the ante" in settlement negotiations. However, contractual provisions calling for the payment of attorney fees were not enforceable in court or arbitration. That has changed thanks to action from the N.C. Legislature.

Typical construction contract clauses on attorney fees follow one of several patterns:

  • ONE-SIDED INDEMNITY: The contractor may agree to indemnify the owner from all liability, loss, or expense, including but not limited to attorney fees arising out of a claim by subcontractors who are suppliers of any material or equipment for installation or incorporation into the work.
  • MUTUAL OBLIGATION TO PAY DISCRETIONARY CHARGE OF COSTS: The parties may agree that the cost of any binding dispute resolution procedure, including reasonable attorney fees, shall be paid by the non-prevailing party, as determined by the adjudicator of the dispute.
  • MUTUAL INDEMNITY: The parties may agree to indemnify one another against any and all liabilities, claims, demands, damages, losses, costs, and expenses of any kind or nature, including but not limited to reasonable attorney fees, arising out of any breach of the contract.
  • MUTUAL OBLIGATION TO PAY NON-DISCRETIONARY CHARGE OF COSTS: The parties may agree that in any lawsuit or other proceeding brought to enforce the terms of their agreement, then the unsuccessful party shall pay the prevailing party all its court costs and reasonable attorney fees incurred in bringing or defending such action.

Attorney fees are a transactional cost, not an element of damages. They are part of the cost of doing business, so to speak, and as a matter of judicial tradition have not been allowed in litigation since the beginning of our American judicial system. So even though they represent a substantial expense that is incurred only because a dispute arises or a contract is breached, they have not been recoverable. The NC Court of Appeals has even said that attorney fees cannot properly be set off against the balance otherwise owed on a contract when the default is not contested.

Over time, North Carolina lawmakers have chipped away at the general rule by enacting various statutes authorizing courts to award attorney fees in specific instances, often as a means of encouraging parties to settle their disputes. The prospect of paying the other side's attorney fees helps parties to take a harder look at each other's positions and can facilitate settlement. So, for example, you might get an award of attorney fees in an unfair trade practice case, or for collecting a promissory note, or when defending a claim that was found by the Court to be so unwarranted as to be "non-justiciable," or for prevailing on a lien claim.

In these examples, only the promissory note required a contractual agreement to pay attorney fees. What matters is that there is a statute that allows attorney fees to be assessed as part of the court costs.

Nevertheless, even after the N.C. Legislature adopted a statute which allows the payment of attorney fees on actions for the enforcement of claims of lien in 1995, as often as not, the appellate courts held that an award of attorney fees was not warranted.

Effective October 1, 2011, the Legislature finally gave courts and arbitrators the authority to enforce attorney fees clauses in commercial contracts. With the new legislation, courts are required to enforce attorney fees clauses just as they would enforce any other contractual provision. This means that there will now be litigation over some of the various forms of attorney fees provisions, leading to an eventual set of case decisions that instructs us what language works and what language does not.

Don't become a test case. Make sure your attorney fee provision satisfies the requirements of the statute. To be enforceable under the new legislation, a contractual provision calling for attorney fees must be signed by the parties. This is similar to the provision that arbitration clauses must be signed by the parties. The essential point is that an attorney fee provision incorporated by reference, or contained in an unsigned work order, or which is otherwise not part of a signed contract will likely not be enforced.

Next, the contract must be one "entered into primarily for business or commercial purposes." This should encompass most construction contracts, although a question will arise as to whether a home repair contract can contain an enforceable attorney fee provision, because the definition says that a contract that is entered into by an individual primarily for personal, family, or household purposes is not a business contract.

The new law also excludes employment contracts or contracts with the State or another governmental agency of the State. This provision probably excludes any contract entered into with a county. It may or may not exclude contracts with municipalities.

The attorney fee provision must also be reciprocal, so that both parties are equally exposed to the risk that they will pay the other side's attorney fees.

All that said, the amount of attorney fees recoverable is not defined other than that the fee allowed by the court must be "reasonable." "Reasonableness" is not to be governed by a stated percentage of the amount in controversy, nor by the amount recovered in "other cases in which the business contract contains reciprocal attorney fees provisions." When the action is primarily for the recovery of monetary damages, the award of reasonable attorney fees "may not exceed the amount in controversy."

A good number of cases have decided the reasonableness of an award of attorney fees under other statutes, both the reasonableness of making an award, and the reasonableness of the amount of the award; so the parties and courts will turn to those to try to determine what amount is appropriate.

Returning now to the examples set out above: the one-sided promise in the first example is still unenforceable, since it is not reciprocal. The second example, if mutually signed, is enforceable, but it allows the tribunal to exercise discretion in determining whether to award attorney fees. The third example, since it purports to allow a party to recover attorney fees outside a formal dispute resolution process, may go too far. The last example is a variant of the second one, but it treats the payment of fees as a contractual obligation, and therefore should be enforced, with only the size of the award left to the discretion of the tribunal.

If you have any questions, please contact John Mabe at (919-653-7819).

John Mabe practices in the firm's Construction Group. His primary focus is in the construction industry as he represents owners, design professionals, general contractors and subcontractors across the Triangle region and state.  He also handles matters related to real estate dispute resolution and commercial law, and is a certified mediator.

Read more about Nexsen Pruet's Construction Practice Group here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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