Construction lawyers see lots of matters in which a supplier pursues a contractor for unpaid materials that were provided to the contractor on credit. And many times the contractor acknowledges that materials were received, but disputes owing for them because something was wrong with them. As an old contractor who got in trouble with the odd supplier on occasion, I read Atlas Supply, Inc. v. Realm, Inc., decision released on July 30, with some interest. Atlas is a well-known construction supply house, which provided oodles of stuff to the jobs I managed, and which I know to be particularly intolerant of not getting paid (read the lien notices in the DJC for confirmation of that fact).
The agreement Realm signed with Atlas provided that in the event Atlas pursued Realm for non-payment, Realm would “pay the costs of collection, including reasonable attorney fee in suit by Atlas Supply, Inc…for the merchandise sold to [Realm].”
Some of the materials Realm bought apparently failed, and it refused to pay Atlas for them. Atlas sued Realm to recover the purchase price. Realm counterclaimed against Atlas, asserting that the failures of the materials was Atlas’ fault, and that it had been damaged as a result. The kinds of counterclaim causes of action brought by Realm are mandatory under our court rules, which have been interpreted as requiring a party to bring an action it could have brought under the same facts, or face the possibility that it would be precluded from doing so in a future attempt. Both Atlas and Realm also sued the companies that made the materials.
After a mediation resolved all the principal claims, the only remaining dispute between Atlas and Ream was Atlas’ claim for attorney’s fees and costs, which went to court. The Superior Court construed Atlas’ entitlement narrowly under the parties’ credit application, and awarded Atlas only those costs and fees incurred in its effort to collect against Realm. The court categorically denied Atlas any costs and fees it incurred in defending against Realm’s counterclaim.
On Appeal, however, the Court of Appeals rejected the lower court’s interpretation, instead adopting Atlas’ contention that the clause allowed it to recover all the reasonable costs and attorney’s fees expended in the overall effort to collect. And, because disproving the compulsory counterclaims brought by Realm was part and parcel of Atlas’ attempt to prove its own claims against Realm, the Court of Appeals held that the Superior Court erred when it denied the costs and fees Atlas incurred to defend against Realm’s claims, because they were, in fact, incurred “in suit by Atlas..for the merchandise sold…”
In these tough times, we see more and more construction contracts re-inserting the “prevailing party” attorney’s fee provisions that the AIA and other standard documents had long eschewed in an attempt to promote settlement of construction disputes. As a result, those who contemplate adjudicating a dispute need to be mindful of more than just how expensive the pursuit of a claim can (and probably will) be for it. As Realm found out, the assessment of risk in prosecuting any claim needs also to include the close reading of any applicable attorney’s fee provision and whether the risk assessment should include the possibility of paying the other side’s costs and fees, too.