Pop quiz: You represent Claimant in a breach of contract arbitration. The contract, including the arbitration clause, is silent as to any award of attorney fees to the prevailing party in any dispute. Texas law governs the contract and so, as Claimant, you naturally plead for fees. Oddly, in a seeming throwaway line in her response, Respondent also claims fees. You put Respondent’s claim aside mentally because you know that Texas law does not allow prevailing defendants to recover attorney fees in contract lawsuits. Ultimately, Respondent wins -- which, you think, ends the arbitration. But Respondent then moves to recover her attorney fees. “She can’t get fees,” your client asks, “can she?” You confidently reply, “No, under Texas law a winning defendant in a contract dispute gets no attorney fees.”

Question: Are you correct in stating that defense fees are not recoverable in arbitration?

Answer: Maybe not!

 

Those of us who regularly draft and litigate contracts in Texas have a clear understanding of how Texas law handles the award of attorney fees. However, with the arbitration phenomenon in full swing, where more disputes than ever wind up before arbitral bodies, it is important for Texas lawyers to understand how the rules that govern attorney fee awards in arbitration may differ from those we are familiar with in the Texas courtroom. In other words, rules of arbitration sometimes differ from Texas law on the issue of attorney fee awards, and those rules can create an interesting set of wrinkles and potential traps for the unwary.

 

Texas law and the “American Rule”

Texas law provides arbitrators the authority to award attorney fees if the parties have so agreed in their arbitration provision or elsewhere in the disputed contract, or if otherwise mandated by the circumstances (for example, by choice of law analysis). Under Texas law, the right to attorney fees is a substantive legal right, not a procedural matter.1 Moreover, attorney fees are only available if provided for by contract or statute.2 This is known as the “American Rule.”3 Under that rule, attorney fees are generally not available for tort claims.4 One of the most oft-relied upon statutory attorney fees provisions under Texas law is Civil Practice & Remedies Code Section 38.001, which authorizes recovery of attorney fees in a contract claim.5 However, Section 38.001 allows recovery of attorney fees only for a prevailing contract plaintiff, not for a prevailing defendant.6 These are maxims that trial lawyers rely on when litigating under Texas law (and in other jurisdictions adopting the American Rule).

When one enters arbitration, however, all bets are off. There is no guarantee the arbitration panel will entertain a claim for attorney fees under Section 38.001. It is possible that the arbitration panel will look only to the forum’s own rules for awarding attorney fees. As demonstrated below, these rules vary significantly, depending on which forum the parties selected in their agreement to arbitrate.

 

Recovery of attorney fees under
arbitral rules

Circumstances under which attorney fees may become available under rules of arbitration vary among the forums. For example, the American Arbitration Association’s (AAA) Commercial Arbitration Rules (“CAR”) empower the arbitrator(s) to “grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties.”7 The CAR specifically allows the award of attorney fees not only when “authorized by law” or by the parties’ arbitration agreement, but also “if all parties have requested” the arbitrators to award attorney fees.8 The AAA is not unique in this regard. The default rule of the London Court of International Arbitration is that the arbitrators are empowered to award attorney fees, “unless the parties agree otherwise in writing.”9 The Comprehensive Arbitration Rules & Procedures of JAMS permit an award of attorney fees “if provided by the parties’ agreement or allowed by applicable law.”10 The Better Business Bureau’s Rules of Arbitration (Binding) permit the award of attorney fees only if “specifically agreed by all parties”.11 The Financial Industry Regulatory Authority’s (FINRA) Code of Arbitration Procedure vaguely permits award of “costs and expenses…that are within the scope of the agreement of the parties.”12 This language has been held by at least one federal court to encompass attorney fees.13

 

The attorney fees pitfall (or windfall) for arbitration litigants

As shown by the examples, it is possible under some arbitral rules for a party not otherwise entitled to attorney fees under the American Rule to nevertheless recover fees in arbitration. For example, consider the AAA CAR. Suppose the contract you are litigating contains an arbitration provision adopting these rules. Suppose also that the contract specifies that Texas law governs its performance, interpretation and enforcement. Under Texas law, the respondent (defendant) would not be entitled to her attorney fees, even if she prevailed on all counts.14 Thus, under the provision of AAA CAR 43(d)(ii) permitting an award of attorney fees where “authorized by law,” the prevailing respondent would not be entitled to her fees. However, suppose further that both parties’ respective pleadings contained the boilerplate language asking that they be awarded their attorney fees. Under AAA CAR 43(d)(ii), the arbitrators would, ostensibly at least, be empowered to award attorney fees to the prevailing respondent-- contrary to Texas law and the American Rule. This precise outcome has been upheld by courts, including Texas courts.

In Thomas v. Prudential Securities, Inc.,15 the Austin Court of Appeals upheld an arbitrator’s award of attorney fees to the prevailing respondent, Prudential, and denied the claimant’s request to vacate the award. The dispute involved claimant’s allegation that Prudential committed fraud.16 Fraud is typically not a claim for which a prevailing defendant (or any party, generally) can recover attorney fees under Texas law.17 Pursuant to the parties’ arbitration agreement, the arbitration occurred before the New York Stock Exchange (NYSE) and was subject to the NYSE’s arbitration rules.18

The Thomas court upheld the award on several grounds. First, the court noted that NYSE arbitration rule 629(c) permits the award of “other costs and expenses,” a phrase that had been construed to include attorney fees.19 Second, the court found it “significant” that, in their pleadings to the arbitrators, both sides had requested award of attorney fees.20 The Court noted that the “scope of the arbitrators’ jurisdiction is determined by the intent of the parties as expressed through the contract containing the arbitration clause and the submission agreement.”21 The court further stated that when “parties actually submit an issue to the arbitrators, courts additionally look to the scope of the submissions as a reflection of the parties’ intent.”22 Because both parties pleaded to the arbitrators for attorney fees, the Thomas court felt that was a reflection of “their unified intention to authorize the panel’s award of attorney fees.”23

Courts in other jurisdictions approach the issue in a manner similar to Thomas. In Warner Bros. Records, Inc. v. PPX Enterprises, Inc.,24 a New York appellate court upheld the arbitrators’ award of attorney fees because the arbitration in question was governed by the AAA CAR, which permits an award of attorney fees where both parties so request; and both parties did plead for their fees.25 In Roberts v. Finger et al., a New York trial court was faced with the same issue in a case alleging breach of contract and various torts.26 Despite the nature of the claims, the arbitrators awarded the prevailing respondent her attorney fees. The trial court, faced with claimant’s request to vacate the arbitration award on grounds that the arbitrators exceeded their powers by awarding fees to a prevailing defendant, noted that the AAA CAR governed the arbitration.27 The court denied claimant’s motion and upheld the fee award as being within the arbitrators’ authority because (1) AAA CAR 43(d)(ii) permits the award of fees when requested by both sides, and (2) because both sides pleaded for their fees.28

The cases demonstrate how it is quite possible for attorney fees to be awarded in arbitration, even in situations where the American Rule typically does not permit such awards.

 

Ways to avoid the pitfall (or take the windfall)

There may be ways to either avoid this potential pitfall or take advantage of a windfall -- it’s all a matter of perspective, and may depend on whether you are dealing with an already existing arbitration provision or you are planning one that is yet to be drafted.

Pre-existing arbitration provisions: If your client’s existing arbitration agreements specify a particular set of arbitral rules, your options may be limited. If the arbitration agreement adopts the AAA CAR (award of fees if both parties request), the Arbitration Rules of the London Court of International Arbitration (fees presumed available unless the parties agree in writing otherwise), or some other set of rules that expressly provides for the award of attorney fees, it is likely that the arbitrators are empowered to award fees regardless of what the controlling substantive law says. When faced with the AAA CAR, if your client is the claimant you should carefully consider the impact of potentially being ordered to pay the respondent’s fees, before making your own boilerplate fee demand -- lest you trigger CAR 43(d)(ii).

If foregoing your client’s right to fees is unacceptable, and your client is the claimant, you might consider a tailored fee demand, one that expressly states that the claimant is not invoking the “if both parties request” provision of CAR 43(d)(ii), but rather that your client’s sole intent is to alert the arbitrators that claimant is entitled to its fees under the governing substantive law.29 Perhaps an even safer alternative for the claimant who faces this situation is to forego asking for fees initially, and move the arbitration panel for an order allowing claimant to plead for its fees under the American Rule without waiving its right to oppose an award of fees to respondent.30 (Under the London rules, because fees are available unless both sides agree to the contrary in writing, there appears to be little the claimant can do, aside from approaching the respondent and seeking to mutually forego the award of attorney fees.)

Drafting of new arbitration provisions: As you draft arbitration provisions and/or advise clients on whether such provisions should be included, carefully review and consider the controlling arbitral rules (if any). Do those rules address attorney fees? If so, what triggers their availability? Being aware of those rules will allow you to properly address this issue before the arbitration provision is signed and binding. For example, you might include a carve-out for attorney fees, expressly stating that availability of fees is to be determined by the governing substantive law, not the arbitral rules. Such a provision would likely be honored by both the courts and the arbitral body. For example, the AAA CAR expressly provides that “the parties, by written agreement, may vary the procedures set forth in these rules.”31

 

Conclusion

The bottom line is that we must understand how the rules in our existing arbitration agreements - and those proposed for future agreements - handle attorney fees. We cannot blindly assume that the American Rule - familiar to us under Texas law - will apply in arbitration. Knowing in advance how arbitral rules handle the award of attorney fees allows us to determine the best approach to either avoiding a potential pitfall or taking advantage of a potential windfall.

Shawn Bates is a partner with Yetter & Warden, L.L.P., where he specializes in business and technology litigation and arbitration. He is a 2000 graduate, magna cum laude, of Georgetown University Law Center, where he was an editor of the Georgetown Law Journal. The author would like to thank his colleagues Prof. David Hricik, Ed Dawson, Collin Cox and Dori Kornfeld for their review and comment on this work.

 

Endnotes

1.Rapp Collins Worldwide, Inc. v. Mohr, 982 S.W.2d 478, 487–88 (Tex. App.--Dallas 1998, no writ).  This is not unique to Texas.  See, e.g., Mo. State Ins. Co. v. Jones, 290 U.S. 199 (1933); Kucel v. Walter E. Heller & Co., 813 F.2d 67, 73 (5th Cir. 1987).  As one court has stated, “[s]tatutes providing for attorneys’ fees impose a liability which one may enforce as a matter of right. Such fees are put in controversy in the suit and are a part of the substantive right.” Prudential Ins. Co. of Am. v. Carlson, 126 F.2d 607, 611 (10th Cir.1942) (citing Jones, 290 U.S. at 202).   2.Harrison v. Gemdrill Int’l, Inc.,981 S.W.2d 714, 719 (Tex. App.--Houston [1st Dist.] 1998, rev. denied).   3.See, e.g., Thomas v. Prudential Securities, Inc., 921 S.W.2d 847, 849 (Tex. App.--Austin 1996, no writ)   4.Metropolitan Life Ins. Co. v. Haney, 987 S.W.2d 236, 243 (Tex. App.--Houston [14th Dist.] 1999, pet. denied).   5.Tex. Civ. Prac. Rem. Code § 38.001(8).   6.Green Int’l, Inc. v. Solis, 951 S.W.2d 384, 390 (Tex. 1997); Barkhausen v. Craycom, Inc., 178 S.W.3d 413, 415 n.1 (Tex. App.--Houston [1st Dist.] 2005, rev. denied) (“Chapter 38.001 allows recovery for attorney’s fees for some types of successful affirmative claims, but does not provide for the recovery of such fees to a prevailing defendant.”).   7.AAA CAR, Rule 43(a) (November 2004) (available at www.adr.org).   8.Id., Rule 43(d)(ii).   9.Arbitration Rules of the London Court of International Arbitration, Art. 28.3 (January 1, 1998) (available at www.lcia.org).    10.JAMS Comprehensive Arbitration Rules & Procedures, Rule 24 (available at www.jamsadr.com).   11.BBB Rules of Arbitration (Binding), § 3 (Remedies) (available at www.bbb.org).   12.FINRA Code of Arbitration Procedure, §§ 12902 (Customer Disputes) and 13902 (Industry Disputes).  FINRA was created in July 2007 “through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange.”  See FINRA website, “About FINRA”, at http://www.finra.org/AboutFINRA/CorporateInformation/ index.htm.   13.The language authorizing arbitrators to award other “costs and expenses” was within former NYSE Arbitration Rule 629(c), and has been held to include attorney fees.  Prudential-Bache Secs., Inc. v. Tanner, et al., 72 F.3d 234, 243 (1st Cir. 1995).   14.Green Int’l, Inc., 951 S.W.2d at 390; Barkhausen, 178 S.W.3d at 415 n.1 (“Chapter 38.001 allows recovery for attorney’s fees for some types of successful affirmative claims, but does not provide for the recovery of such fees to a prevailing defendant.”).   15.921 S.W.2d 847 (Tex. App.--Austin 1996, no writ).   16.Id. at 848.   17.Star Houston, Inc. v. Shevack, 886 S.W.2d 414, 422 (Tex. App. -- Houston [1st Dist.] 1994, writ denied).   18.921 S.W.2d at 849.   19.Id. at 849-50.   20.Id. at 851.   21.Id. at 849 (citing Executone Info. Sys. v. Davis, 26 F.3d 1314, 1323 (5th Cir. 1994)).   22.Id.   23.Id. at 851.   24.776 N.Y.S.2d 269 (N.Y. App. Div. 2004).   25. Id. at 330-31.   26.2007 WL 1093487 (N.Y. Sup. 2007).   27.Id. at *10.   28.Id.   29.The author believes that the AAA should reconsider CAR 43(d)(ii).  Rule 43(d) should contain an express mechanism whereby a Claimant can plead for its fees based on the American Rule (assuming the substantive law governing the arbitration so permits), without having unintentionally triggered the Respondent’s right to fees based on “both parties having requested” fees.   30.While these approaches seem theoretically viable, the author is not aware of supporting case law.   31.AAA CAR 1.