Make Collections Affordable With Loser-Pays Contract Provisions
by American Subcontractors Association

A new white paper published by the American Subcontractors Association (ASA) urges specialty trade contractors to consider adding language to subcontract agreements spelling out who will pay attorney fees in case of disputes. ASA notes in the white paper that most (but not all) major model contract documents in the construction industry do not contain such language, thereby forcing specialty trade contractors to incur additional expenses when they hire attorneys to collect payments for properly performed work.

ASA's white paper, "Dispute Resolution: The Cost," explains that "subcontractors often find that the cost of collecting overdue payments from customers, including particularly the cost to employ a lawyer, renders pursuit of unpaid accounts economically unattractive, or even foolish." Spending $10,000 for an attorney to collect $7,500 does not make sense, and, ASA's paper explains, the current legal system generally does not provide subcontractors relief from the costs of collection.

Without legal relief to resort to, most subcontractors must modify subcontract agreements in order to make it economical to pursue claims for amounts that are less than the cost of collecting them. This means adding a contract provision to the effect that the loser in the dispute must pay attorney fees. Even in the few states that do have loser-pays laws, the laws are not always effective. ASA's white paper states: "While California's prompt payment law, applicable to private construction, mandates that attorneys' fees 'shal'" be awarded to a 'prevailing party' in any suit for 'collection of funds wrongfully withheld,' other states have no such provision, or leave the award to the discretion of the court, or even limit awards of attorneys' fees to cases where the unpaid subcontractor can prove 'bad faith.' Thus, most construction subcontractors are unable to collect attorneys' fees in a collection action absent a contract provision requiring such an award." Unless a subcontractor is willing to write off some debts because they are too costly to collect, the subcontractor's best option is to include language in the contract that shifts the cost of dispute resolution and collection to its customer.

Subcontractors can point out to customers that including a loser-pays provision in a contract is not without precedent. ASA's white paper points out that the Associated General Contractors of America's 200 and 650 (1998) documents include language awarding the costs of attorney fees to the prevailing party in a dispute arising from the contract. The ASA Subcontractor Bid Proposal (2005) and ASA Addendum to Subcontract (2005) also contain loser-pays language. ASA's white paper gives examples of the loser-pays contract provisions in the ASA documents. In addition, the white paper advises subcontractors to use provisions that "encourage the parties to make, and seriously consider, reasonable settlement offers."

Remember that, as a subcontractor, you are a creditor, and as such, you must protect your investment or risk losing it. Consider making it economically feasible for you to collect all the debt for the work you perform under every agreement you sign.

Learn more about recovering attorney fees in disputes. Visit ASA's Web site at www.asaonline.com and click on "Stand Up! for Subcontractors," or call ASA at (703) 684-3450.

Contact: David Mendes
(703) 684-3450, Ext. 1335
dmendes@asa-hq.com