Attorney fees are an important calculation in any dispute. While it may be worth a dime to recover a dollar, it is rarely worth a dollar to recover a dime. Often parties will anticipate the transaction costs of litigation and protect against them by including contract provisions for a “prevailing party’s” recovery of attorney fees. This can mitigate the cost of litigation, but also adds an element of risk.
A recent Washington Court of Appeals opinion, Atlas Supply, Inc., v. Realm, Inc., et al., highlights an important consideration for parties contemplating litigation and the impact of an “attorneys fees” provision in a contract: to what claims will the provision apply? The Court offers guidance for a contract that provides for payment of fees incurred in collecting a debt: all claims and defenses necessary to collect a debt will be covered. In that case, the Court of Appeals reversed the trial court and found such a provision covered a party’s defense of certain counterclaims, not just its affirmative collection action.
The facts of the case are simple. Atlas Supply Inc. (“Atlas”) was in the business of selling construction and industrial supplies manufactured by third parties. A construction company, Realm Inc. (“Realm”), purchased construction materials from Atlas on credit. The credit application signed by Realm included an obligation “to pay the costs of collection, including reasonable attorney fee in suit by Atlas Supply, Inc. . . . for the merchandise sold to applicant.”
The products failed and Realm denied payment. Atlas sued to recover, and Realm counterclaimed for breach of contract, breach of warranty, and negligent misrepresentation. In addition, Atlas filed a third party complaint, and Realm filed a “fourth party” complaint against Atlas’s suppliers. The parties attempted to resolve their dispute in mediation, after extensive litigation and after incurring significant attorney fees. They agreed to a settlement whereby the manufacturers provided payment to Realm, and Atlas accepted reduced payment from Realm. But the settlement fell apart on the issue of attorney fees.
The parties proceeded to trial and the court imposed a judgment mirroring the parties proposed settlement. Atlas then submitted a motion for its attorney fees. The trial court held that it was entitled only to fees incurred prosecuting its collection action, but not for defending Realm’s counterclaims. The logic was simple: the contract allows for payment of fees incurred in a collection action, and defending a counterclaim is not a collection action.
The Court of Appeals reversed, explaining that because the counterclaims effectively decided the collection action, Atlas had to defend them in order to collect and thus the contract contemplated payment for those defense fees. In other words, because Atlas would have lost its collection action if it lost on Realm’s counterclaims, Atlas’ defense was in effect part of its collection action and thus Realm owed Atlas its defense fees.
A different outcome would have resulted had the counterclaims had no impact on the collection action itself. It is, therefore, critical to carefully analyze the governing contract language and all pertinent claims and defenses a lawsuit entails before weighing the risks of litigation expenses. Moreover, careful consideration should be given to the language in attorney fees provisions before a contract is signed.
