March 29, 2016
Those of you who have had me work with you to review and revise your form contracts whether you are a general or sub know that I recommend you include a provision for recovery of interest and attorney’s fees if there is a dispute with your customer. You can have a contract clause that provides for this that is one sided, namely you get interest on any unpaid balance and you recover your attorney fees if there is a dispute and an award is made in your favor. Some of you agree with this but some of you express you do not want the contract to be too harsh so that prospective customers are scared away. When I hear this, I suggest the provision for recovery of attorney’s fees be made reciprocal. I then draft a provision that states if there is a dispute that results in either a lawsuit or arbitration the prevailing party is to recover interest on the award and reasonable attorney’s fees. I can also include language about recovering costs if that is desirable. The interest rate should be set at a rate that makes a difference. Currently the Illinois Mechanic’s Lien Act provides for interest at ten percent so I would not set the rate any lower.
You may be wondering, do provisions for interest and attorney’s fees make any difference and are they of any real value? In my opinion they are. Let me provide an example.
I am in the process of settling a matter for a client where the claim is approximately $257,000. The client is a luxury home builder and was going to build a house that was estimated to cost approximately 12.5 million. The client’s architectural group designed the house but with a project of this magnitude as is usual the customer was working with an interior designer to select finishes, colors etc. The interior design project was dragging on so the client and its customer decided to proceed to start demolition of the existing structures on the property, do the site grading and construct the foundation and swimming pool. A separate contract for this construction was entered. Unfortunately when the work was finished and the third and final draw was to be paid the homeowner refused to pay. This particular homeowner builds a number of clinics throughout the country and has a commercial architect who began to critique the client’s work on the house and interfered to the point that the homeowner lost confidence in the work our client did. Allegations were made that the soils compaction was not proper, the foundation was not reinforced properly, the steel framework was not structurally sound and more.
Per the terms of the contract I filed a demand for arbitration for the money that was owed, $257,000 plus interest and attorney’s fees. The foundation contract provided for the prevailing party to recover not only the amount found due but also attorney’s fees and the costs of the arbitration and any other related expenses. In addition interest at the statutory rate set forth in the Illinois Mechanics Lien Act is to be given on the money awarded which as noted above is currently ten percent.
Within a short period of time after the arbitration demand was made, the homeowner’s attorney contacted me and made an offer of settlement in the amount of $150,000. I inquired why a deduct of over $100,000 should be considered and the response was that there were numerous defects in our client’s work that needed to be corrected. While our client had no intention of considering this offer, I used it to learn what their defense to the claim would be. I contacted the homeowner’s attorney and asked to see any reports they had, test results regarding soils and proposals and paid bills for corrective work. What I received convinced me and our client that the homeowner’s claims were not well founded. Soils analysis was done when the soils were wet which resulted in a few areas where the psi did not conform to contract requirements. My client knew that if they waited for the soil to dry out its strength would come back and once the drainage system was operational there would be no problems. A report that the steel had not been erected properly was also bogus because after the report had been done our steel subcontractor corrected any deficiencies. My client dug in and directed me to reject the settlement proposal which I did without making any counterproposal for settlement.
A few weeks went by and without any contact on my part the homeowner’s attorney made another offer of settlement increasing the offer by $75,000. My client and I found it strange that another offer to settle would be made without us having made any counterproposal. However, this confirmed in our minds that the homeowner’s claims that the work was defective were not well founded. My client and I discussed the matter and decided that we would hold firm with our position that nothing was wrong with the work and full payment of the balance due had to be made. I agreed with the client that if he felt strongly that the work was done properly he should remain steadfast that the full amount due had to be paid. However, I knew that in settlement everyone has to “get something” so I suggested making a counterproposal where the client would waive the claim for attorney’s fees and interest if the full amount due was paid. I calculated the interest that had accrued which at the time was over $13,000 and made a proposal in writing to the homeowner’s attorney that if they agreed to pay the $257,000 our client would waive interest and attorney’s fees. The counterproposal has been accepted, a settlement agreement agreed to and right now we are working with the escrow agent to process payment of the settlement funds to our client and the subcontractors that worked on the project. Everyone is being paid in full.
As you can see, the provision for recovery of attorney’s fees and interest at a significant rate helped make this settlement. This provision in the contract gave us negotiating leverage where we could be adamant on recovery of one hundred percent of the claim and yet give the other side something. I reminded the homeowner’s attorney that if they did not settle now the homeowner would be paying a significantly greater amount if we went through full arbitration with an award being made in our client’s favor. The homeowner would then be subject to paying interest on the award from the last day worked and my attorney’s fees and the expenses of the arbitration.
I think you can see the advantage of having an attorney’s fees and interest provision in your form contracts. This type of provision gives you leverage in settlement. If you do not have this type of provision in your form agreements you can contact me and I can draft provisions that will give you this advantage should a dispute arise on one of your projects. The cost incurred to do so is minimal compared to the long range benefit and leverage obtained. I would be happy to work with any of you to review and revise your form agreements.