Texas Update: HB 1578 – Attorney’s Fees - Construction and Procurement Law News, Q3 2021

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Effective September 1, 2021: HB 1578 closes the loophole of the previous version of Chapter 38 of the Texas Civil Practice & Remedies Code so that parties will be able to recover attorneys’ fees from LLCs, LLPs, LPs, or other organizations in lawsuits for breach of contract.

Generally, Texas law provides that each party to a lawsuit is responsible for her attorneys’ fees. However, Texas law has long provided that a party in a breach of contract claim may recover her attorney’s fees in addition to the damages she suffers. This exception to the rule has certain procedures that must be followed and is outlined in Chapter 38 of the Texas Civil Practice & Remedies Code.

While parties to lawsuits have long utilized this exception to the rule, Chapter 38’s language did not explicitly allow for the recovery of attorney’s fees when the party who is held responsible for the breach of contract was not either an individual or a corporation. While in practice this seems unreasonable, the plain language of Chapter 38 excluded other business entities such as limited partnerships (LPs), limited liability partnerships (LLPs) and limited liability companies (LLCs). This led to decisions by the Texas courts that pointed out that if the legislature meant for Chapter 38 to include LLCs, LLPs and LPs, then it would have written the law to specifically include those entities. Ultimately, many Texas courts disallowed the recovery of attorney’s fees in cases involving entities other than corporations and individuals.

HB 1578, which goes into effect for lawsuits filed on or after September 1, 2021, amends Chapter 38 to specifically include these business entities that are not traditional corporations. Under the new law, with some limited exceptions, attorney’s fees are available in lawsuits for breach of contract involving a: corporation, limited or general partnership, limited liability company, business trust, real estate investment trust, joint venture, joint stock company, cooperative, association, bank, insurance company, credit union, savings and loan association, or other organization.

While correcting the statute so that it performs as intended, this change is a double-edged sword that may affect businesses. If a business chose an entity form in part based on avoiding potential attorney’s fee awards, then this change to the law will impact its business. This may also impact how these businesses, who find themselves in litigation, manage their legal risks and evaluate claims.

It is important to note that while a change in Chapter 38 will have a great impact on breach of contract claims, businesses can still utilize their contracts to provide consistency with claims and the availability of attorney’s fees for breach of those contracts. As always, business owners should consult with their counsel to discuss their contracts and the impact this may have on risk mitigation and claims management in the future.

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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