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Escaping the American Rule: Shen Valley Masonry v. Thor and Attorney's Fees
September 8, 2010
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Topics Litigation

Virginia follows the “American Rule,” which basically stands for the proposition that each litigant is on the hook for its own counsel fees. However, as we have discussed numerous times, parties are free to enter into contracts that deviate from the norm. Fortunately for Thor, Inc., the contract it had with Shen Valley Masonry contained just such an attorneys' fees provision allowing it to escape  the American Rule. In the recent case of Shen Valley Masonry Inc. v. Thor, Inc., in the Circuit Court for the City of Roanoke, Judge Apgar had a chance to review this attorneys' fees provision in detail.

In September 2004, Shen Valley and Thor entered into a written contract in which Shen Valley agreed to perform masonry work for the Wilson Middle School construction project in Fisherville, Virginia for a fixed price of $1,050,000. After Shen Valley finished its work on the school in January 2006, it demanded an additional $587,824.47 for brick based on an alleged oral contract with Thor. Thor refused to pay, and Shen Valley filed suit against Thor and its bonding company for breach of contract and quasi-contract theories. The case went to jury trial, and Thor prevailed at a motion to strike at the end of Shen Valley’s evidence.

Four months after the trial, Thor moved for attorneys' fees based on the parties’ written contract, which stated:

To the fullest extent permitted by law, you [Shen Valley] agree to defend, indemnify and hold harmless Thor, Incorporated, the Owner, the Architect/Engineer and all of their agents and employees from and against all claims, damages, losses, fines, penalties and expenses, including but not limited to attorney’s fees, arising out of, or resulting from the performance, or failure in performance, of your Work under this Subcontract Agreement.

Shen Valley fought Thor’s attorneys' fees demand on a variety of grounds. First, Shen Valley argued that Thor waived its claim pursuant to Virginia Supreme Court Rule 3:25 because Thor failed to identify the specific basis it was relied on to claim attorneys' fees. Thor’s answer contained one line in the prayer for relief asking the court to “grant Thor its attorneys’ fees and expenses to the extent allowed by law.” Rule 3:25 (B) requires a party to make an attorneys' fees demand in a complaint, counter- or cross-claim, third party pleading or responsive pleading, identifying the specific basis upon which it relies to claim those fees. Rule 3:25 (C) makes it clear that a party who fails to file such a demand waives its right to recoup its fees. The court held squarely that Thor’s prayer for relief did not meet Rule 3:25’s specificity requirement. But Rule 3:25 did not take effect until mid-2009, two and a half years after Thor filed its responsive pleading. Fortunately for Thor, Judge Apgar ruled that Rule 3:25 was not retroactive.

Next, Shen Valley argued that Thor waived its claim for attorneys' fees because it failed to present evidence of its fees at trial and because there was no agreement between the parties or approval by the court to bifurcate the attorneys' fees claim. Judge Apgar pointed out that the case ended at motion to strike after Shen Valley’s evidence, and that Thor would have had no opportunity to present evidence of its fees. In fact, Rule 3:25 (D) gives the courts flexibility in setting up a procedure (albeit pre-trial) for adjudicating attorneys' fees claims.

Judge Apgar had absolutely no problems tossing Shen Valley’s next argument. Shen Valley actually argued that Thor had no basis for seeking fees because there was a question as to whether the parties entered into a valid written contract in the first place. Judge Apgar found this wholly inconsistent with Shen Valley’s position at trial, including its own complaint that attached a copy of the contract with the indemnification language.

Shen Valley’s final argument had a bit more merit. Shen Valley claimed that the indemnification provision only applied to third party claims, and did not apply to fees incurred in defending against its oral contract and quasi-contractual claims. Judge Apgar followed Virginia Supreme Court precedent concluding that broad indemnification provisions using the language “to the fullest extent permitted by law,” indemnifying “against all claims…arising out of or resulting from the performance of the Work” included claims between the parties as well as third party claims. Judge Apgar also reviewed Thor’s answer and affirmative defenses, in which Thor denied the existence of any oral contract and insisted that any work performed was performed pursuant to the parties’ written contract. Because the defenses arose under the contract, Judge Apgar ruled that Thor was entitled to recover its attorneys' fees.

We could certainly benefit from a healthy discussion on whether we should do away with the American Rule and award the prevailing party its attorneys' fees. But in the meantime, the lessons to take from this case are:

  1. Include well drafted attorneys' fees and indemnification provisions in your contracts.
  2. Recall Rule 3:25 (B). In your very first first pleading, specify the exact contractual provision, statute or other authority that you are relying on to recover attorneys' fees.
  3. Also recall Rule 3:25 (D). Raise the issue of how attorneys' fees will be adjudicated well in advance of trial.

Stay posted for further discussions and other recent cases about attorneys' fees....