Are Attorney’s Fees Recoverable in Construction Dispute Arbitration?

As with most questions in law, it depends. Typically, attorney’s fees are recoverable only if the contract contains an attorney’s fees provision or if the claims involve a statute, such as the Tennessee Consumer Protection Act, allowing a party to recover attorney’s fees. Recently, in Lasco, Inc. v. Inman Construction Corp., No. W2014-00802-COA-R3-CV (Tenn. Ct. App. Jan. 9, 2015), the Tennessee Court of Appeals considered a unique twist on the recoverability of attorney’s fees in a construction contract dispute.

In Lasko, a dispute arose between a general contractor and a subcontractor related to a commercial construction project. A few details of the parties’ contract are important here: 1) the contract had an arbitration clause, 2) the contract did not include an attorney’s fees clause, and 3) the contract incorporated the AAA’s Construction Industry Arbitration Rules.

The subcontractor filed suit against the general contractor in state court to collect amounts the subcontractor claimed were due under the contract. The case was then sent to arbitration. Following the arbitration hearing, the arbitrator denied all of the subcontractor’s claims and awarded the general contractor nearly $175,000 in attorney’s fees and costs. The subcontractor then filed a motion in state court to vacate the arbitrator’s award of attorney’s fees. Likewise, the general contractor filed a motion to confirm the arbitration award in its entirety. The trial court vacated the award of attorney’s fees on the basis that attorney’s fees were not authorized by the parties’ agreement to arbitrate.

On appeal, the Tennessee Court of Appeals was tasked with determining whether the arbitrator’s award of attorney’s fess was appropriate. The subcontractor argued that the arbitrator exceeded his powers because the arbitration award went beyond the scope of authority grated by the arbitration agreement. In other words, because the parties’ arbitration agreement did not include an attorney’s fees provision, any award of attorney’s fees was not within the scope of the arbitrator’s power. On the other hand, the general contractor argued that because the contract incorporated the AAA’s Construction Industry Arbitration Rules, the award of attorney’s fees was within the authority of the arbitrator. These construction dispute specific AAA rules provide for an award of attorney’s fees under certain circumstances, including when all parties, as part of their arbitration demands or claims, request an award of attorney’s fees. The Court of Appeals agreed with the general contractor, finding that the parties’ agreement incorporated the AAA rules, which provided for an award of fees under the circumstances of this case.

This case is important because it emphasizes the importance of understanding all terms of a construction contract. Even if the contract does not contain a separate and specific attorney’s fees provision, there may be a basis to recover attorney’s fees through arbitration, such as the incorporation of a AAA Rule or other arbitration rule providing for an award of fees.

Further, this case underlies the limited power of a trial court to modify or vacate an arbitration award. Tennessee has adopted the Uniform Arbitration Act, Tenn. Code Ann. §§ 29-5-301, et seq., which governs the scope of judicial review of arbitration awards. In Tennessee, courts accord deference to arbitrators’ awards and overturn arbitration awards in only in very unusual circumstances. Courts do have the power to vacate arbitrators’ awards in narrow circumstances, such as if “the arbitrators exceeded their powers.” Tenn. Code Ann. § 29-5-313(a)(3). Trial courts in Tennessee, however, are not permitted to supplement their judgment for that of the arbitrators. The Tennessee Supreme Court has held that “[a]s long as the arbitrator is, arguably, construing or applying the contract and acting within the scope of his authority, the fact that a court is convinced he committed serious error does not suffice to overturn his decision.” Arnold v. Morgan Keegan & Co., 914 S.W.2d 445, 449 (Tenn. 1996).

If you or your business enters into a contract that contains an enforceable arbitration provision, it is vitally important to understand the consequences and finality of arbitration. Many construction contracts mandate some form of arbitration, and it is important to seek competent legal counsel that can advise you on the arbitration process. If you have questions regarding a business dispute and are considering or facing arbitration, contact the Business Litigation and Dispute Resolution Attorneys at Thompson Burton PLLC.