On April 21, 2015, the Missouri Court of Appeals in City of Chesterfield v. Frederich Construction Inc. upheld an arbitration award that included substantial attorneys' fees to the prevailing party, in a construction case where neither the contract nor a statute provided for such an award. It did so because both parties had requested an award of their fees in the arbitration demand and answer and had agreed at the time of contracting that the Arbitration Rules of the American Arbitration Association (AAA) would govern any future arbitration.
These types of requests are frequently made whether or not the party is entitled to attorneys' fees by contract or statute, because in most cases there is no jeopardy in doing so ("no harm, no foul"). The AAA's Arbitration Rules turn this assumption on its head. And Frederich Constriction shows that courts will not lightly disturb an arbitrator's award of fees based solely on a mutual demand for them made in passing. Businesses must now use extra caution when deciding whether to ask for their attorneys' fees, as doing so may give rise to an obligation to pay the other side's fees should it win the arbitration.
The so-called "American Rule" in the judicial system is that each side pays only for its own lawyers, not those representing the other side. The two principal exceptions to the rule are:
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A contract between the parties says the prevailing party may recover its attorneys' fees;
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A statute exists to the same effect.
In Frederich Construction, neither exception was initially in play. The City of Chesterfield, Missouri, hired Frederich Construction as a general contractor, under contracts that called for the parties to arbitrate any disputes using the Construction Industry Arbitration Rules of the AAA. A dispute arose, was arbitrated, and Frederich was the victor, at which point the arbitrator awarded the company its attorneys' fees. The city challenged in court the fee award (of just under $280,000), claiming that the arbitrator had no authority to enter it because the parties' contract did not call for awarding the prevailing party its attorneys' fees, and no applicable statute called for an award either. The state trial court disagreed, and the Missouri Court of Appeals affirmed.
The appellate court pointed to the arbitrator's observations in fashioning the award that both parties "requested" an award of attorneys' fees and said the Arbitration Rules would apply to their disputes. Construction Arbitration Rule 45(d)(ii) recognizes the power of the Arbitrator to award attorneys' fees when authorized by contract or statute – the two typical exceptions noted above. That provision includes a third exception for an award of attorneys' fees "if all parties have requested such an award." The basis for finding that the contractor "requested" an award of fees was its prayers for relief in its answer and counterclaim, even though the requests were clearly boilerplate.
Frederich Construction follows a recent trend of upholding fee awards under similar circumstances. The federal Court of Appeals for the Eighth Circuit did likewise in 2011 in Wells Fargo Bank, N.A. vs. WMR e-Pin, LLC. The cases offer both a lesson and an opportunity.
Stop, think, and be careful what you ask for. Companies that have agreed by contract to arbitrate their disputes, but not to award the prevailing party its fees (and where no statute calls for an award in the circumstances), should think carefully about whether to request attorneys' fees in the arbitration if the contract incorporates any version of the Arbitration Rules of the AAA. If the other side has expensive or aggressive counsel, or if your case is on the weaker side, it might be prudent to resist the temptation to include a request for attorneys' fees in your arbitration submissions. The prospect of having their attorneys' fees awarded could be just the incentive your opponent needs to push the matter to a conclusion that it might otherwise not have reached.
Seize your opportunity. On the other hand, the operation of this exception to the "American Rule" also presents an opportunity for owners or upstream contractors to recover attorneys' fees where there otherwise would be no contractual or statutory right. This could occur when there is no "prevailing party" provision in the contract, but there is a statutory right given to a downstream contractor to recover fees under a prompt-pay statute. When the contractor naturally requests its fees under the statute, the upstream contractor or owner can now raise the stakes and improve its position by also requesting its own attorneys' fees under Rule 45(d)(ii), thus creating its own right to recover attorneys' fees where none existed before.
