The Texas legislature has sent to Governor Abbott a bill closing a huge loophole in the Texas statute requiring the award of attorneys’ fees to a successful plaintiff in most breach of contract actions.^[1] Texas courts interpreted Texas Civil Practice & Remedies Code Section 38.001 only to award attorneys’ fees against individuals and corporations, not limited liability companies, partnerships, and similar entities.^[2] In three legislative sessions, bills were introduced to rectify this quirk in the law, but only in 2021 did legislation finally pass both the Texas House and Senate.^[3]

What does this amendment mean for you?

This amendment, if signed by Governor Abbott, changes Section 38.001’s language to allow recovery of attorneys’ fees from “another person” (as defined by the Texas Business Organizations Code)^[4] rather than “individuals or corporations.”^[5] “Person” includes most private legal entities, including natural persons, LLCs, and partnerships.^[6]

This change will be effective only in lawsuits filed on or after September 1, 2021. As a result, if you are contemplating filing a lawsuit asserting a claim to which Section 38.001 applies, you should consider waiting until September 1, 2021.

Can you recover attorneys’ fees when successfully defending against a claim?

Section 38.001 does not award attorneys’ fees to a defendant who successfully defeats a breach of contract or similar claim. The new legislation does not alter that portion of the existing law. The law only permits a plaintiff (or counter-plaintiff) who prevails in a breach of contract or similar claim to recover attorneys’ fees if the plaintiff also recovers damages.^[7]

How can you control who recovers attorneys’ fees?

The best way to control what fees are recoverable in a dispute over a contract is by drafting appropriate language when the contract is written. Under Texas law, the contract may specifically waive the recovery of attorneys’ fees under Section 38.001, or include a clause providing that the prevailing party, whether plaintiff or defendant, will recover fees. It may also be beneficial to include language awarding litigation expenses (such as expenses of attorneys; expert witness fees; deposition, forensic, and computer expenses), which Section 38.001 does not address.

Consider evaluating your attorneys’ fees clauses in light of these potential new changes in law.

^[1] Tex. S.B. 808, 87th Leg., R.S. (2021).

^[2] See Tex. Civ. Prac. & Rem. Code Ann. § 38.001 (West 2011); see also Alta Mesa Holdings, L.P. v. Ives, 2016 WL 1534007 (Tex. App.—Houston [14th Dist.] Apr. 14, 2016) (holding that a limited liability company is not a “corporation” for purposes of Section 38.001); see also Base-Seal, Inc. v. Jefferson County, 901 S.W.2d 783, 786­–88 (Tex. App—Beaumont 1995, writ denied) (holding that “individual” means natural person); see also Fleming & Associates, L.L.P. v. Barton, 425 S.W.3d 560, 576 (Tex. App.—Houston [14th Dist.] 2014, pet. denied) (holding that a plaintiff may not recover attorneys’ fees from a partnership); see also Choice! Power, L.P. v. Feeley, 501 S.W.3d 199, 213–14 (Tex. App.—Houston [1st Dist.] 2016, no pet.) (holding that a plaintiff may not recover attorneys’ fees from a limited partnership.

^[3] See Tex. H.B. 370, 86th Leg., R.S. (2019); see also Tex. H.B. 744, 85th Leg., R.S. (2017).

^[4] Tex. Bus. Orgs. Code Ann § 1.001 (69-b) (West 2020) (“Person means an individual or a corporation, partnership, limited liability company, business trust, trust, association, or other organization . . . .”).

^[5] Tex. Civ. Prac. & Rem. Code Ann. § 38.001 (West 2011); see also Tex. S.B. 808, 87th Leg., R.S. (2021).

^[6] Tex. Bus. Orgs. Code Ann § 1.001 (69-b) (West 2020).

^[7] Barkhausen v. Craycom, Inc., 178 S.W.3d 413, 415 (Tex. App.—Houston [1st Dist.] 2005, pet. denied); Green Int’l., Inc. v. Solis, 951 S.W.2d 384, 390 (Tex. 1997).

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