THE RECOVERABILITY OF INTEREST AND ATTORNEYS’ FEES IN MASSACHUSETTS’ CONSTRUCTION LITIGATION

By Jonathan P. Sauer

I. Introduction. Two issues which come up in most typical construction collection cases are: can we collect the attorney’s fee necessarily-incurred to collect the money? And, what do we get for interest? Both concepts are involved in situations where one is chasing money as the plaintiff: not resisting paying claims as a defendant. (As discussed below, sometimes defendants may be entitled to their attorneys’ fees in certain cases.)

As these two subjects are not well-understood - and, because you can improve your potential position with each of these issues with a little advance planning - these bear delving into.

II. Attorneys’ Fees.This is a little understood area. Clients typically assume that if they win their case, they will get attorneys’ fees.

A. You have to win your case. The first question is, then, what is the actual chance that a client will win its case? Well, a ‘win’ is generally going to mean that you tried your case to a conclusion in front of a judge or jury and got a judgment or verdict in your favor. In many cases, a ‘win’ might be that you moved for summary judgment and won. (Ed. This is a court procedure, usually undertaken towards the end of the pretrial portion of the case, whereby without a trial - but with a lot of paperwork (motion, brief, affidavits) - a case can be concluded where one party demonstrates to the court that there is an absence of a genuine, material (important) issue of fact and that the moving party is entitled to judgment as a matter of law.)

B. The vast majority of superior court civil cases never go through a complete trial. Here’s the rub! The answer is that there is little chance you will win your case because, unless you are very unlucky, the vast majority of cases will settle before trial. The latest statistics the author is aware of suggests that of every one hundred civil cases filed in the superior court, fully ninety-nine percent of them will never be fully-tried. In other words, of every one hundred superior court cases filed by a plaintiff, from a statistical standpoint, only one of them will go through a complete trial. While this may be surprising to read, another factor to keep in mind is that the court system has a tremendously hard time even handling this small amount. For one thing, almost all cases filed will require some pretrial handling of one kind or another. Also, the difficulty is due, in part, to a more litigious society. Other factors include: the tremendous amount of time required to organize and prosecute a case, reductions in court personnel in recent years to save money and the fact that criminal cases are subject to certain constitutional guarantees of speedy trial that can cause criminal defendants to be ‘let go’ if they aren’t tried and processed quickly enough. Since somewhere in the vicinity of about two-thirds’ of all court business is criminal in nature (varies from county to county and from superior court to district court and, to some extent, from year to year) the requirements of the criminal justice system is pre-eminent within the court system.

I submit that for construction cases which will go to court, there is some possibility that the actual figure for this type of case might be less than one percent. For, these statistical figures include negligence cases where the issue of ultimate liability on the part of the defendant may be seriously in question. This would include, for example, medical malpractice cases, defective product cases, premises liability cases, ice and snow cases, slip and fall cases, etc. One case I worked on many years ago was how long a switch on a circular saw had to last before its failure made the saw a defective product. The evidence was that the injured party had the circular saw for at least twenty-one years, didn’t take very good care of it (basically, kept in on a shelf underneath his work bench amid the clutter) and the switch accidentally turned on when the person wasn’t expecting it, gashing his leg. Since liability in that kind of case is more likely to be contested - nothing lasts forever - the presence of an insurance company behind the defendant anxious to keep the loss down – makes a trial more likely.

Also, the court system loathes construction cases both because they take a long time to try and they are boring for the judge. Here is where experience often helps control the process. I had a case last year where my client was a defendant in a six figure construction collection case. There was a pretrial hearing in September. Just before the hearing, the Plaintiff’s attorney indicated that he was looking for a November trial date. This would be a very unusual result in any county, particularly Suffolk County, where this case was. A typical period of time from pretrial to trial would be three or four months. The plaintiff was rumored to be in difficult circumstances, possibly closing down. The female clerk was about my age – perhaps, a bit older. We engaged in some airy persiflage prior to the hearing, the kind of innocent flirting that passes the time and there is a lot of waiting time in the court business. When the case was called and the clerk was looking at the judicial calendar, I told her that this was a construction case, adding, “I know how the court just loves to hear a good construction case.” Without missing a beat, she assigned a trial date nine months down the road. In the interim, the plaintiff subcontractor closed its doors.

Another factor in there being fewer civil trials is that while the criteria by which judges are evaluated by their supervisors is not fully understood by outsiders, such information as is available on this subject indicates that one criteria is how many cases a judge disposes of in any particular month. Thus, by this criteria, a judge is considered a ‘good judge’ if he or she has a higher clearance rate per month. Perhaps it is for this reason that a certain Middlesex superior court judge, now retired, used to call his civil cases in for status conference seemingly every month, making the attorneys stay for an hour or two to discuss settlement ‘in the hall’. Indeed, that same judge used to order defendants having insurance to bring the claims representatives to these hearings. Oftentimes, this would be a very effective mechanism in concluding cases.

A word on district court cases. Typically, these cases involve claims seeking less than twenty-five thousand dollars. Our experience has been that the smaller the amount of damages claimed is, quite often, the harder people will fight to get them or to avoid paying them. Believe it or not, larger cases are often easier to settle than smaller ones, where the defendants may have fewer assets and might be more likely to be impecunious.

A word on arbitration cases. As faithful readers of Scribbles and attendees of my seminars are aware of, this writer is not generally a fan of arbitration, irrespective of how widespread this may be (or has been) in construction litigation. This opposition is based, in part, on how blindingly expensive all the fees to the American Arbitration Association may be on a large case, including fees to the arbitrator (at a couple of hundred bucks or higher per hour), room fees, stenographer fees, etc. Also, generally, speaking, arbitration awards can’t be appealed, giving arbitrators near god-like power. (A cynic might note that the word ‘arbitration’ seems to have a lot of letters in common with the word ‘arbitrary’.)

Here’s another reason against arbitration. For whatever reason, our subjective experience has been that these cases settle a lot less often than court cases. One can only surmise that where litigants find the process and prospect of going to court to be fear - inducing, somehow the process and prospect of arbitration - which can be a great deal more final and conclusive than court - to be less so. Thus, one might strike the arbitration clause in the contract for no other reason than the fact that disputes which will be arbitrated have a greater tendency of actually being tried.

C. The American Rule on attorneys’ fees

Massachusetts generally follows what is called ‘The American Rule’. This is summarized, as follows. As stated by the Supreme Judicial Court in the case of Preferred Mutual Insurance Company v. Gamache, 426 Mass. 93,95, 686 N.E.2d 989 (1997):

“The usual rule in Massachusetts is to prohibit successful litigants from recovering their attorney's fees and expenses except in a very limited class of cases. This rule is known as the "American Rule." See Waldman v. American Honda Motor Co., 413 Mass. 320, 321-323, 597 N.E.2d 404 (1992). Our traditional approach has been to prohibit recovery of attorney's fees and expenses in a civil case in the absence of either an agreement between the parties, or a statute or rule to the contrary, and this principle has been applied to deny recovery of attorney's fees and expenses in declaratory judgment actions. See Fuss v. Fuss (No. 1), 372 Mass. 64, 70-72, 368 N.E.2d 271 (1977); Wachusett Regional Sch. Dist. Comm. v. Erickson, 354 Mass. 768, 238 N.E.2d 369 (1968).”

Therefore, in Massachusetts, unless the contract you are suing on provides for the payment of attorney fees to the prevailing party or unless the statute you are suing under provides for an attorneys’ fee to the successful plaintiff (e.g. Massachusetts public payment bond claims, unfair and deceptive trade practice cases), the only attorney’s fee you are entitled to if you win your case is the so-called ‘statutory’ attorney’s fee, which is taxed as a ‘statutory cost’ in the amount of two dollars and fifty cents!

D. Attorneys’ fees not recoverable on performance bond claims

As Sauer & Associates files a fair number of complaints against performance bonds, it may be helpful to comment on the recoverability of attorneys’ fees in those kinds of cases.

In the case of Town of East Longmeadow v. Maryland Casualty Company, 348 Mass. 722, 729, 206 N.E.2d 54, 59 (1965), the Supreme Judicial Court said:

“Counsel fees in this action against Maryland to recover for its breach of its obligation are not recoverable. Donaldson v. Boston Herald-Traveler Corp., 347 Mass. 274, 280-281, 197 N.E.2d 671. The auditor found that the services were rendered 'in settlement discussions with the defendant, preparation for trial, and trial of this action.' The other minor items, summarily referred to by the town, are adequately and rightly dealt with in the judge's findings.”

The case cited in that case for authority, Donaldson v. Boston Herald-Traveler Corp., 347 Mass. 274, 280-281, 197 N.E.2d 671, 676, stated:

“While, as an original proposition, further examination might be desirable, the general principle has become firmly established in this Commonwealth that no recovery may be had for counsel fees in the very action to redress a plaintiff's wrong, as distinguished from other counsel fees which the plaintiff has been compelled to pay. Goldberg v. Curhan, 332 Mass. 310, 312, 124 N.E.2d 926, and cases cited. MacNeil Bros. Co. v. Cambridge Sav. Bank, 334 Mass. 360, 363, 135 N.E.2d 652. See Bright v. American Felt Co., 343 Mass. 334, 337, 178 N.E.2d 855. The Legislature must be taken to have been aware of this principle. Had the statute been intended to embrace all counsel fees as damages, we are of opinion that an express statement to that effect would have been made.”

E. Attorneys’ fees may be recoverable in frivolous cases

C. 231, s.6F of the General Laws provides, in pertinent part:

“Upon motion of any party in any civil action in which a finding, verdict, decision, award, order or judgment has been made by a judge or justice or by a jury, auditor, master or other finder of fact, the court may determine, after a hearing, as a separate and distinct finding, that all or substantially all of the claims, defenses, setoffs or counterclaims, whether of a factual, legal or mixed nature, made by any party who was represented by counsel during most or all of the proceeding, were wholly insubstantial, frivolous and not advanced in good faith. The court shall include in such finding the specific facts and reasons on which the finding is based.

If such a finding is made with respect to a party's claims, the court shall award to each party against whom such claims were asserted an amount representing the reasonable counsel fees and other costs and expenses incurred in defending against such claims. If the party against whom such claims were asserted was not represented by counsel, the court shall award to such party an amount representing his reasonable costs, expenses and effort in defending against such claims. If such a finding is made with respect to a party's defenses, setoffs or counterclaims, the court shall award to each party against whom such defenses, setoffs or counterclaims were asserted (1) interest on the unpaid portion of the monetary claim at issue in such defense, setoff or counterclaim at one hundred and fifty per cent of the rate set in section six C from the date when the claim was due to the claimant pursuant to the substantive rules of law pertaining thereto, which date shall be stated in the award, until the claim is paid in full; and (2) an amount representing the reasonable counsel fees, costs and expenses of the claimant in prosecuting his claims or in defending against those setoffs or counterclaims found to have been wholly insubstantial, frivolous and not advanced in good faith.

Apart from any award made pursuant to the preceding paragraph, if the court finds that all or substantially all of the defenses, setoffs or counterclaims to any portion of a monetary claim made by any party who was represented by counsel during most or all of the proceeding were wholly insubstantial, frivolous and not advanced in good faith, the court shall award interest to the claimant on that portion of the claim according to the provisions of the preceding paragraph. In any award made pursuant to either of the preceding paragraphs, the court shall specify in reasonable detail the method by which the amount of the award was computed and the calculation thereof.

No finding shall be made that any claim, defense, setoff or counterclaim was wholly insubstantial, frivolous and not advanced in good faith solely because a novel or unusual argument or principle of law was advanced in support thereof. No such finding shall be made in any action in which judgment was entered by default without an appearance having been entered by the defendant. The authority granted to a court by this section shall be in addition to, and not in limitation of, that already established by law.

If any parties to a civil action shall settle the dispute which was the subject thereof and shall file in the appropriate court documents setting forth such settlement, the court shall not make any finding or award pursuant to this section with respect to such parties. If an award had previously been made pursuant to this section, such award shall be vacated unless the parties shall agree otherwise. . . . .”

Here are our comments on this statute. It certainly reads well and seems to provide an opportunity to recover attorneys’ fees. Note, however, that one doesn’t get attorneys’ fees on a settlement and the vast majority of cases are settled. Also, fees are not recoverable where a ‘novel or unusual argument or principle of law is advanced’. In terms of real world court applications of this statute, in our practice, we just haven’t seen these fees imposed, although the literature certainly does have examples of where they are imposed. In part, this may be because of the fact that judges are also lawyers and all participants in the court process know that the practice of law is as much (or more) art rather than science. To a large extent, an attorney taking on a case is not going to have an encyclopedic knowledge of the matter. There may not have been time to learn everything that there was to know. And, as a practical matter, clients often don’t realize what are relevant facts and what facts are irrelevant. Thus, they often don’t tell attorneys about the parts of the potential case that the attorney may need to know. Sometimes a client will misrepresent the facts of the case to the attorney and while the law does require some due diligence of the attorney before commencing an action, it may not be possible – usually, isn’t possible – to know every last thing about the matter at the beginning. And, the legal process itself encourages zealousness, even aggression. In terms of collecting attorneys’ fees on marginal cases, it will come as little surprise that cases where either the claims are defective or where the defenses to the claims are defective are among the first cases to settle once attorneys (sometimes, supervising attorneys) have an opportunity to review them.

F. As sanctions against an attorney

Our movie-going readers may recall a John Travolta movie a bunch of years ago based on a real life Massachusetts case called A Civil Action. In that movie, the defendants’ attorneys attempted to have sanctions imposed on the plaintiff’s attorney for bringing an action against a defendant chemical company. These are under what is referred to as “Rule 11”, which is one of the myriad rules regulating what an attorney can do and not do in the prosecution of a case. As I recall, they were not granted in the movie, and, although the literature has notable examples of their being imposed in sometimes very glaring, notorious and often extremely embarrassing circumstances, one is much less likely to see them in run of the mill, less than glamorous contractual litigation.

III. Interest

Chapter 231, s. 6C of the General Laws provides (with regard to contract actions):

§ 6C. Interest added to damages in contract actions

“In all actions based on contractual obligations, upon a verdict, finding or order for judgment for pecuniary damages, interest shall be added by the clerk of the court to the amount of damages, at the contract rate, if established, or at the rate of twelve per cent per annum from the date of the breach or demand. If the date of the breach or demand is not established, interest shall be added by the clerk of the court, at such contractual rate, or at the rate of twelve per cent per annum from the date of the commencement of the action, provided, however, that in all actions based on contractual obligations, upon a verdict, finding or order for judgment against the commonwealth for pecuniary damages, interest shall be added by the clerk of the court to the amount of damages, at the contract rate, if established, or at a rate calculated pursuant to the provisions of section six I from the date of the breach or demand. If the date of the breach or demand is not established, such interest shall be added by the clerk of the court from the date of the commencement of the action.”

Now, under a different Massachusetts statute, any charging of interest and charges in excess of 20% per annum by lenders is a crime. Presumably, charging anything up to this figure is lawful and possible. A casual review of a number of credit applications used by our material supply clients suggests that 18% per annum is a customary interest charge and many of them - the national clients, in particular - specifically list different figures for different states.

IV. Suggestions

A. Contract language

Remember, that you can’t floss your teeth after they have already fallen out! And, you can’t milk Bessie the Cow if, like Elvis ‘she has left the building’ because no one closed the door! A famous English jurist is reputed to have said more than eight hundred years ago that: "An ounce of prevention is worth a pound of cure." (Henry de Bracton's De Legibus c. 1240)

In contractual matters, this means that you have to put things into the contract to have the possibility of improved remedies. Thus, if your company is a material supplier or a subcontractor - in order words, more likely to be a plaintiff than a defendant in collection matters - it behooves you to have some standard terms in your proposal, which you make sure ends up as part of the contract. For material suppliers, typically, credit applications provide that in the event a matter goes to an attorney for collection, reasonable attorneys’ fees are collectible. As I simply love to quote myself, the following is from a model credit application I prepared, which is on our newly revised website - www.sauerconstructionlaw.com:

“6. If COMPANY in its sole judgment turns this account over to a collection agency or attorney for collection, APPLICANT herein agrees that such reasonable collection and legal fees and expenses will be added to APPLICANT’S indebtedness, whether or not suit is actually ever brought.”

Now, I have seen attorneys’ fee provisions done two different ways. The first way is to simply say that if your company has to sue and your company wins, then it will be entitled to an attorney’s fee as part of the award or judgment. A less preferable way is to have a provision in your contract that the prevailing party in any litigation concerning the contract will be entitled to an award of attorneys’ fees.

The latter, in some technical ways, may be regarded more favorably by a reviewing court because, theoretically, contractual provisions of this sort are supposed to be bilateral or capable of application in either direction. Whether it is a fiction or not, courts like to see contracts which appear to have been entered into in an ‘arms’ length transaction’, which contain language equally applicable (and favorable) to each party in like measure.

Two things dictate against using the latter approach, however. First, for what earthly reason would your company be interested in potentially increasing the award of your contracting party against you should you fail to convince the trier of fact that you are right. Secondly, one case comes to mind which I am aware of where a subcontractor sued a general contractor for about sixty grand on a collections case against a counterclaim of about the same amount. The arbitrator gave the subcontractor - after four or five days of trial - only ten thousand dollars. Since the attorneys’ fee clause contained ‘prevailing party’ language, however, the arbitrator assessed against the general contractor arbitration fees and costs and counsel fees against the general contractor, which were equal to several times the actual award. For, since the subcontractor recovered something, this made it a ‘prevailing party’.

Now by having the former attorneys’ fee provision - only your company gets them ifyour company wins - there is some possibility that a judge might refuse to enforce them since no attorneys’ fees are payable when there is an opposite result. (Such an interpretation would be less likely where there is an underlying credit application and the plaintiff is a material supplier against whose materials there is no objection.) It would seem more reasonable to risk that sort of interpretation than potentially subject oneself to the penalty of attorneys’ fees against the plaintiff should the plaintiff’s view of the facts and law not be acceptable to the fact-finder (judge).

And, from the same redoubtable writer and authority, with regard to the matter of interest:

“5. Any invoices which are overdue and delinquent (meaning unpaid within thirty days after rendering) shall earn simple interest until such invoice is paid in good funds at the highest rate allowed by the law of the state COMPANY is located in or of whatever state law may be applicable to the transaction underlying the invoice or at the rate of twenty per cent per annum, whichever rate is lower.”

B. Write letters before you hand-off to counsel

Our subjective experience is that many contractors have a hard time writing letters

for one reason or another. Particularly when submitting claims to sureties, submit your claim early, in writing, and as completely as possible with the first submission. (Look at “Ice Box Payment Bond Claims” on the website for some suggestions.) As indicated above, the interest statute applies when a matter has gone to judgment. Still, in a small number of cases, attorneys’ fees - more likely (and, more frequently), interest - can be negotiated as part of a settlement when there should never have been a case in the first instance. Particularly with sureties and insurance companies, as regulated industries subject to various statutory requirements having to do with how claims are supposed to be handled in certain (and, particularly, egregious) circumstances it might be an unfair and deceptive trade practice to require a claimant to institute litigation to recover sums which were clearly owed.

To be able to attempt to demonstrate this, it is important to establish a comprehensive and early documentation - a record - on your claim and one that pre-dates the filing of the case. Having a lawyer submit the claim saying that if there is no payment in two weeks from the insurance company, suit for all damages (including interest and counsel fees) will be commenced is, from a practical standpoint, essentially useless. This is for a number of reasons. Getting a check out of an insurance company computer in less than two weeks is almost a miracle in and of itself. Certainly, no insurance company can (or will) pay any claim until it is fully-documented and reviewed, to some extent. On a payment bond claim, the surety will attempt to get its principal’s position on the claim before paying to protect indemnity rights. A last minute lawyer’s letter just prior to suit doesn’t allow this process to take place and won’t provide grounds for settlement for interest and counsel fees, generally speaking.

And, since most cases are settled, getting your claim in early to third party payers (owners on mechanics’ liens, sureties on contract claims) is likely to have the effect of shortening the time you have to wait for your check and minimizing those counsel fees you will have to pay to prosecute the claim as a litigation. Don’t confuse ‘going legal’ with ‘going to trial’. A great many cases will have to be filed as litigations to protect your company’s substantive rights. Since some process is likely, handling as much of the claim documentation as possible yourself, is both cost-effective and may be time-effective, as well.

C. Be realistic in your expectation in the settlement of cases

Unless you have provided for attorneys’ fees as a contract term in the contract you are you are suing on, in all likelihood, in a settlement you simply are not likely to get them as you aren’t entitled to them and even statutes providing for them generally require a judgment first. Similarly, since interest is generally only recoverable when there has been an underlying judgment, a settlement somewhere in the middle of the case isn’t going to entitle you to some interest. That being said, and, particularly with surety bonds, it is easier to get some interest from a surety than it is to get some attorneys’ fees, although some element of lack of diligence on the surety’s part is typically necessary.

In a small number of particularly egregious cases I have been involved with or am aware of, I have seen out a very determined plaintiff can get interest and counsel fees more often by simply advising the other party (parties) that there will be no settlement of the case without them. While this does work occasionally, those who employ this strategy should keep in mind that over-used or employed in the wrong circumstances, may have just the opposite effect. In other words, keeping an otherwise-settled case open for interest and counsel fees is often (even, usually) not cost-effective. And, if this comes to the attention of the overworked judge, he or she might attempt to rearrange - or painfully modify - your corporate body parts!