One of the first questions most attorneys are asked at the start of formal dispute proceedings is whether the client can recover attorneys’ fees and costs. Most clients are sorely disappointed to learn that the default rule – known generally as the “American Rule” – is that each party must pay their own attorney fees.
Despite this, there are several instances where clients can recover attorney fees in construction disputes. This blog post discusses the different grounds for recovery of such fees.
Contracts between sophisticated parties often address attorneys’ fees responsibility, frequently referred to as “fee-shifting.” These contractual fee-shifting clauses can come in a number of flavors, including:
A recovery by drafting party clause allows fee recovery only by the party drafting the contract. These clauses are most frequently found in contracts prepared by contractors and signed by owners. If you represent an owner, fee shifting language should either be deleted or made mutual.
A recovery by the prevailing party clause allows fee recovery by the party that “prevails” in the dispute proceeding. While this provision is better than a one-sided recovery provision, it raises many questions. For instance, what does it mean to “prevail”? A party might defeat a claim entirely but be awarded no money. What if the parties have claims against each other and both are successful? These are all questions to consider when drafting and enforcing fee shifting clauses in contracts.
Statutory Claims in Construction Disputes
Another avenue for fee shifting is through statutory claims.
Lauren Triebenbach, Marquette 2007, is a shareholder with von Briesen & Roper, s.c., Milwaukee, where she focuses on construction, banking, and real estate law.
Mark E. Schmidt, George Mason 2004, is a shareholder with von Briesen & Roper, s.c. in Milwaukee, where he litigates construction, real estate, and commercial disputes.
Several statutes, mostly in the consumer protection purview, permit fee shifting to the plaintiff upon successful prosecution, including:
Theft by Contractor: Wis. Stat. Sections 779.02(5), 895.446, and 943.20
When a contractor holding funds for the benefit of another contractor uses those funds for “any other purpose,” it is guilty of theft by contractor. If a party prevails on a claim for theft by contractor, not only is the party entitled to recover its “actual damages,” but also statutory punitive damages of up to three times the amount misappropriated and the “costs of investigation and litigation,” which has been interpreted by Wisconsin Courts to include attorneys’ fees.1
Home Improvement Practices Act: Wis. Stat. Sections 100.20(5) and ATCP 110: ATCP 110
The Home Improvement Practices Act falls within the purview of the Department of Agriculture, Trade, and Consumer Protection (DATCP).
Because DATCP’s resources are overwhelmed by complaints by consumers, the legislature incentivized owners to prosecute their own violations of ATCP 110 by permitting recovery of double damages and a “reasonable attorney fee.”2
Fraudulent representations: Wis. Stat. Section 100.18
Any person who induces the sale of:
“any real estate, merchandise, securities, employment, service, or anything offered by such person, firm, corporation or association, or agent or employee thereof, directly or indirectly, to the public for sale, hire, use or other distribution”
based on an advertisement, statement, or representation that is “untrue, deceptive, or misleading” is responsible for the plaintiff’s pecuniary damages, costs, and reasonable attorneys’ fees.3
This statute is most commonly used in real estate failure-to-disclose cases.
Sanctions: Wis. Stat. Section 802.05(3)
Attorneys and parties who file pleadings have a duty:
- not to present a paper for improper purposes, such as to harass, cause delay, or increase the cost of litigation;
- to advance contentions and arguments warranted by existing law or a non-frivolous argument for the extension of existing law; and
- to allege facts supported by evidence or likely to have evidentiary support after a reasonable investigation.
If, after notice from an opposing party, a pleading that violates any of these rules is not withdrawn or modified, “the court may award to the party prevailing on the motion reasonable expenses and attorney fees incurred in presenting or opposing the motion.”
Equity as Basis for Awarding Fees
As noted above, the so-called “American Rule” is that each party must pay its own attorney fees.
In Nationstar Mortgage LLC v. Stafsholt,4 however, the Wisconsin Supreme Court concluded that circuit courts have discretion to award attorney fees, despite the American Rule, as an equitable remedy. In the case, the defendants filed a counterclaim of equitable estoppel in response to plaintiff’s mortgage foreclosure action.5 Stafsholt argued that the plaintiff had induced him to default on his mortgage.6 The circuit court agreed and reinstated Stafsholt’s mortgage.7 The circuit court also awarded Stafsholt attorneys’ fees and costs based on equitable estoppel.8 The plaintiff appealed, and the court of appeals reversed the award of attorneys’ fees to Stafsholt based on the American Rule.
Stafsholt took the matter to the supreme court, which agreed with him. Writing for the majority, Justice Michael Gableman said, “attorney fees may be awarded as an equitable remedy ‘in exceptional cases and for dominating reasons of justice.’”9
This power of courts is not unlimited, however. According to Stafsholt, this power is reserved for situations where sanctions pursuant to Wis. Stat. section 802.05 will not suffice.10
Recovery of Attorneys’ Fees Under Third-Party Exception to American Rule
An important exception to the American Rule is the “third-party litigation exception.” This applies when the “wrongful act” of the defendant forces the plaintiff into litigation with a third party. When this occurs, a plaintiff can seek to recover attorneys’ fees from the defendant as damages.11
Until recently, many attorneys understood that the wrongful act necessary to invoke the third-party litigation exception needed to be a tort such as fraud or breach of fiduciary duty.12 Earlier this year, however, the court of appeals held in Talmer Bank & Trust v. Jacobsen13 that a breach of contract can be a wrongful act that triggers the third-party litigation exception.
In Talmer, land contract purchasers were brought into a foreclosure action initiated by a bank. The land contract purchasers sought to recover attorney fees from the sellers. The purchasers argued that, but for the sellers’ breach of contract in failing to remit payments to the bank, they never would have been sued – and forced to incur attorney fees – in the foreclosure action. The court of appeals agreed, holding that “where a breach of contract draws a plaintiff into litigation with a third party ... attorney fees ... are viewed as part of the recoverable damages.”14
The construction industry involves many multiparty arrangements between owners, contractors, material suppliers, and lenders. This web of relationships creates circumstances where parties can be drawn into litigation as the result of another party’s wrongful acts, including breach of contractual duties. As such, the court of appeals’ clarification in Talmer that the third-party litigation exception applies to a breach of contract could lead to an increased volume of claims for recovery of attorney fees.
Amount of Recoverable Attorney Fees
Clients often review pleadings and reasonably conclude that, because the ad damnum clause includes a request for attorneys’ fees, the losing side must pay the prevailing party’s actual attorney fees.
Not so. Rather, as many of us have advised disappointed clients, in a standard case recoverable attorneys’ fees are limited by statute to $500.15
Even when a contract or statute allows for recovery of attorneys’ fees, the prevailing party is not necessarily entitled to recover the actual amount of fees. Instead, courts generally determine a “reasonable” attorney fee using statutory criteria:
- time and labor required by the attorney;
- novelty and difficulty of the questions involved in the action;
- skills requisite to perform the legal service properly;
- the likelihood that the acceptance of the particular case precluded other employment by the attorney;
- fees customarily charged in the locality for similar legal services;
- amount of damages involved in the action;
- results obtained in the action;
- time limitations imposed by the client or by the circumstances of the action;
- nature and length of the attorney's professional relationship with his or her client;
- experience, reputation, and ability of the attorney;
- whether fee is fixed or contingent;
- complexity of the case;
- awards of costs and fees in similar cases;
- legitimacy or strength of any defenses or affirmative defenses asserted in the action; and
- other factors the court deems important or necessary to consider under the circumstances of the case.16
In addition to the above factors, there is a rebuttable presumption that attorney fees should not be more than three times the amount of damages awarded.17
Prevailing Party Usually Does Not Recover Attorney Fees
Under the American Rule, the prevailing party is generally not entitled to recover attorney fees. When it comes to construction cases, there are several exceptions to this rule, however.
Attorneys should carefully consider these exceptions whenever a dispute arises, particularly given the recent trend of Wisconsin courts to countenance fee-shifting.
1See Estate of Miller v. Storey, 2017 WI 99, ¶ 49, 378 Wis. 2d 358, 384, 903 N.W.2d 759, 771. For a discussion, see “Supreme Court Affirms Attorney Fees are Recoverable for Theft by Contract, a March 18, 2018, Construction Blog article.
2 See Wis. Stat. § 100.20(5)
3 See Wis. Stat. §§ 100.18(1) and 100.18(11)(b)2
4 2018 WI 21 (March 23, 2018)
5 Stafsholt, 2018 WI 21, ¶ 11
7 Id., ¶ 12.
8 Id., ¶ 14.
9 Id., ¶ 24 (quoting Sprague v. Ticonic Nat'l Bank, 307 U.S. 161 (1939)
10 Id., ¶ 32.
11 See, e.g., Estate of Kriefall v. Sizzler USA Franchise, Inc., 2012 WI 70, ¶ 29, 342 Wis. 2d 29, 816 N.W.2d 853 (stating third-party litigation exception to American Rule applies when: (1) the party from whom fees are sought committed a wrongful act against the party seeking attorney fees; and (2) the commission of such wrongful act forced the party seeking fees into litigation with a third party, or required the party seeking attorney fees to incur expenses protecting that party’s interests against claims arising from the wrongful act).
12 See id., ¶¶ 76-79.
13 2018 WI App 15, 380 Wis. 2d 171, 908 N.W.2d 495
14 Id., ¶ 14.
15 Wis. Stat. § 814.04(1)(a)
16 Wis. Stat. § 814.045(1)(a)-(p). This statutory provision was enacted as part of 2011 Act 92. Prior to the enactment of the statute, courts used the “lodestar” approach, which focused primarily on “the number of hours reasonably expended, multiplied by a reasonable hourly rate, with upward or downward adjustments then made after taking other relevant factors into account.” Lynch v. Crossroads Counseling Ctr, Inc., 2004 WI App 114, ¶ 35, 275 Wis.2d 171, 684 N.W.2d 141. See also Stuart v. Weisflog’s Showroom Gallery, Inc., 2008 WI 22, 308 Wis.2d 103, 746 N.W.2d 762 (lodestar methodology, rather than percentage contingency fee, was proper basis for determination of reasonable attorney fee award in homeowners’ successful action against remodeler and his company for negligence and violations of Home Improvement Practices Act (Wis. Stat. § 100.20)). The number of reasonable hours and reasonable hourly rate remain considerations under Wis. Stat. section 814.045.
17 Wis. Stat. § 814.045(2).