Mediation & Arbitration

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.

Arbitration: This is Not the Way It’s Supposed Happen

arbitrationThe U.S. Court of Appeals for the Sixth Circuit recently released an opinion with a bizarre set of facts, Thomas Kinkade Co., et al. v. White, et al., 2:09-cv-10757 (6th Cir. Apr. 2, 2013). This case concerns a federal court review of an arbitration involving a business dispute between Thomas Kinkade Co. and one of its art dealers, the Whites. The Sixth Circuit succinctly stated that the “arbitration itself was a model of how not to conduct one.”

The circumstances of the arbitration are sorted and full of irregularities, including the following: During the arbitration, counsel for the Whites surreptitiously sent a live feed of the proceedings to disgruntled former employee in a hotel room to assist with the case. The arbitration panel refused to grant Kinkade any relief for the White’s outright failure to respond to pre-arbitration discovery. The panel, over Kinkade’s objections, allowed the Whites after the arbitration to submit further evidence to plug the holes in their legal theories. And, almost inconceivably, during the pending arbitration the Whites sent a large amount of legal business to the lead arbitrator’s law firm. Kinkade, of course, objected to this arbitrator continuing to serve on the panel, and filed a motion with the American Arbitration Association (AAA) to request that it disqualify the arbitrator. The AAA denied Kinkade’s motion and the arbitrator refused to disqualify himself. The arbitration panel ultimately issued an award in favor of the Whites exceeding $1.4 Million.

Immediately after the arbitration panel issued its award, Kinkade filed a petition with an U.S. District Court to vacate the award. The Federal Arbitration Act (FAA), 9 U.S.C. § 1, et seq., governs arbitration in contracts that involve interstate commerce. Importantly, the FAA authorizes federal courts to vacate arbitration awards on certain specified grounds. 9 U.S.C. § 10. One of the limited grounds includes evident partiality or corruption in the arbitrators. 9 U.S.C. § 10(a)(2). In order to establish partiality, a party must generally show that a reasonable person would conclude that the arbitrator was partial to one party. The district court agreed with Kinkade and vacated the arbitration award.

On appeal, the Sixth Circuit focused on one of the primary purposes of arbitration: arbitration is designed to be a party-structured process decided by a third-party neutral. The Court affirmed the district court and summarized its opinion in stating:

A party who pays a neutral arbitrator to prepare for, and then sit through, nearly 50 days of hearings over a five-year period, deserves better treatment than this.

Aside from the bias and partiality issues, one of important lessons from this opinion is the common misconception that arbitrated disputes lead to faster (and therefore, less costly) outcomes than traditional litigation. In this case, the arbitration process lasted nearly 5 years and took nearly 50 arbitration hearing days to complete.

Many contractual disputes 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.

My Business Has Been Sued, Now What?

If you are a business owner, you probably have been sued, threatened with a lawsuit or fretted over the potential for a lawsuit. In our increasing litigious environment, it is not a matter of if you will be sued; it is a matter of when. For the fiscal year 2011, there were nearly 300,000 civil lawsuits filed in federal district courts in the United States. For the fiscal year 2010-2011, there were over 125,000 lawsuits filed in the chancery and circuit courts in Tennessee. This is the latest data as the statistics for the fiscal year 2011-2012 have not yet been released. Also, this data does not include the thousands of suits filed in the general sessions (small claims) courts in Tennessee each year.

Many businesses often find themselves mired in collection disputes with customers, contract clashes with vendors, and employment quarrels with current or former employees. While these are some of the more common types of disputes leading to lawsuits against small businesses, some industries are more exposed to litigation, such as the construction industry and the medical fields. Knowing what to do when you find your business faced with a lawsuit may significantly impact the outcome of the lawsuit.

The following are five important tips to remember when dealing with a new lawsuit:

1. Stay calm: After being served with a lawsuit, do not let your emotions control. The circumstances leading to a lawsuit are often emotional for all of those involved in the dispute. Understandably, you will be upset, but try to prevent emotions from taking over rationale thinking about the situation. The business of your business is what is most important, so do not allow a lawsuit to distract from carrying out your business.

2. Carefully review the lawsuit: Read the papers and understand the claims brought against you. Determine who has been sued, whether there are other entities or persons that are named, where the action is pending, what the allegations are against you and what the other party is seeking though the lawsuit.

3. Do not ignore the lawsuit: You must respond. One of the most important things to remember is that you can lose a lawsuit by default. That is, the party suing may be entitled to all of the relief sought if you fail to timely respond. Be proactive and aware of the deadlines to respond. Remember that your attorney will likely need time to conduct investigation and research prior to responding to the lawsuit. The deadline for responding often depends on where the action is pending. For example, most civil actions in Tennessee state trial courts require a response within in 30 days of service while most civil actions in federal court require a response within 20 days of service.

4. Gather relevant information and documents: Documents and information concerning the dispute will be essential for your lawyer to understand the lawsuit and to provide advice as to your options in dealing with the lawsuit. Also, you should act to preserve pertinent documents and electronic information, as you may be required to disclose this information during the pendency of the lawsuit.

5. Contact an attorney: Your very first call should be to your lawyer. A competent business litigation attorney can create a strategic defense plan to confront the lawsuit head-on and work to resolve the dispute.

As a business litigator who has extensive experience resolving disputes in a wide range of industries, from financial institutions to construction companies, I work hard to understand the clients’ business goals in order to deliver excellent results, whether through trial, mediation, litigation or negotiation. I also regularly work with our business clients to identify and manage risks and develop strategies to avoid lawsuits.

First Post of the Litigation & Dispute Resolution Blog

This year, I began practicing with Thompson Burton, PLLC. Previously, I spent over 7 years with a Nashville litigation firm. I am extremely excited about this opportunity to develop new relationships, expand my practice and service Thompson Burton’s clients.

This blog will be an important tool for me to regularly connect with clients, businesses, and lawyers to provide useful information concerning business and commercial litigation. The purpose of this blog is to provide timely, informative and useful commentary and information on the legal issues impacting businesses. I will bring you current legal developments, trends, cases, verdicts and settlements affecting businesses in Tennessee and across the country. My goal is that this blog will be a resource for business owners, in-house counsel, entrepreneurs and others who are interested in commercial litigation and business law.