Attorneys' fee clauses are engraved invitations to sue

As we start another trip around the sun, hopefully you are in the process of updating your form contracts, including purchase and sale agreements and express written warranties. Because the law and litigation landscape continually changes, it is a good practice to periodically update the forms you use in order to give yourself a fighting chance if and when the plaintiffs' attorneys come knocking on your door. As you engage in this process, I hope that you will take a critical look at whether your contracts include a prevailing party attorneys' fees clause and, if so, whether you should leave it in there. 

In Colorado, parties are entitled to recover attorneys' fees only if provided for by statute or by contract. Historically, plaintiffs' attorneys relied on two statutes, the Colorado Consumer Protection Act and Colorado's Statutory Interest statute, to recover attorneys’ fees in construction defect cases. In 2003, the Colorado legislature capped treble damages and attorneys' fees under the Colorado Consumer Protection Act at $250,000, effectively restricting plaintiffs' attorneys from relying on the CCPA to recoup their attorneys' fees, especially in large cases. In 2008, the Colorado Supreme Court issued its decision in Goodyear v. Holmes, stating that plaintiffs can only claim prejudgment interest under Colorado's Statutory Interest statute, in cases where they have already spent money on repairs, not when they are suing for an estimate of what repairs will cost in the future. Without either the CCPA or the prejudgment interest statute to recover attorneys' fees, plaintiffs' attorneys most often now rely on the prevailing party attorney fee clause in contracts between the owner and builder, or in the declaration of covenants, conditions and restrictions in situations where a claim is prosecuted by an HOA.

In speaking with clients in the past, it seems that the conventional wisdom has been that homeowners or HOAs would be less likely to pursue legal action if there was a threat that they may have to pay the builder's attorneys' fees if they lose. While I cannot speak to any specific situation in which this clause has been used to successfully fend off a construction defect case, I can speak to the innumerable times that we have had to fight with plaintiffs' attorneys about the fees they claimed because our own clients' documents provided for prevailing party attorney fees.

Just for a moment, put yourself in the shoes of a homeowner or an HOA board member. Would you be more or less willing to pursue a construction defect action, or to push questionable claims, if you knew that at the end, you would have to pay your own attorneys' fees out of the cost of repair ultimately awarded? If your contracts provide for prevailing party attorneys' fees, this is not a question that your buyers or HOAs will ever have to answer. With the clause in the contracts or CCRs, plaintiffs' attorneys are able to say, truthfully, that they only get paid if they recover a cost of repair for you, by virtue of the contingent fee agreement used. Better yet, because of the prevailing party clause in the contract or CCRs, they will be able to get the builder to pay the attorneys’ fees, such that it will not even come out of the cost of repair awarded. Viewed in this light, the prevailing party attorneys' fees clause is nothing more than an engraved invitation for your owners to sue.

As you start another year, consider whether the time is right to remove the prevailing party attorneys' fees clause from your purchase and sale agreements and CCRs. It remains appropriate to seek attorneys' fees from subcontractors actually performing the work, as part of their duties to defend and indemnify you, but I believe it is time to reconsider whether you want to provide that incentive to your homeowners or HOAs.

For additional information on attorneys' fees, or construction litigation in Colorado, you can reach Dave McLain by telephone at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.