In litigation matters involving common interest communities (otherwise known as homeowners associations (“HOAs”) or condominium owners associations (“condo associations”)), the issue of awarding attorneys’ fees for prevailing parties ultimately arises. Generally, the HOA’s Governing Documents or the condo association’s Condominium Instruments contain such a provision. Otherwise, attorneys’ fees may be recoverable by statute for HOAs and condo associations.

These attorney fee-shifting provisions, either by contract or statute, are contrary to the typical “American Rule” cases in which each side pays their own attorneys’ fees. Because litigation has become so expensive to pursue, whether to award attorneys’ fees, and the amount of any award, has become separate litigation on its own at the conclusion of cases.

In the recent case of Dewberry & Davis, Inc. v. C3NS, Inc., the Virginia Supreme Court was faced with the issue of “whether the circuit court erred in applying an attorneys’ fees provision of a contract.” We had previously blogged about this case, because in the underlying contract between the parties, Dewberry & Davis, an engineering company, had limited its liability for damages. The trial court had determined the limitation of liability clause was void, pointing to a recent change to Virginia Code § 54.1-411that permitted an engineering company to include a limitation of liability clause. Because the contract predated the code change, the court determined that those changes “demonstrate that the General Assembly fully intended to alter the statute’s intent.”

The case continued to trial, and eventually, upon appeal, to the Virginia Supreme Court. This blog post explains that Supreme Court decision relating to the award of attorneys’ fees.

Factual Background

In the underlying litigation, Dewberry & Davis filed a fee claim against C3NS. C3NS counterclaimed for breach of contract. The contract between the parties contained an “attorneys’ fees” provision:

The losing party shall pay the winning party’s reasonable attorneys’ fees and expenses for the prosecution or defense of any cause of action, claim or demand arising under this Agreement in any court or in arbitration.  The attorneys’ fees payable to us for the collection of compensation you owe us shall be twenty-five percent of any judgment or award against you and our attorneys’ fees, expenses, and collection costs.

The parties agreed to “bifurcate” the issues of the underlying claims from the issue of whether to award attorneys’ fees. Therefore, the trial court would determine which party prevailed in the claim and counterclaim before considering whether to award attorneys’ fees.

At the bench trial, the court awarded judgment to Dewberry & Davis. The court reasoned that “even if Dewberry had breached the contract . . . [C3NS] could not recover on its counterclaim . . . because [C3NS] had been the first to breach the contract.” Consequently, the only remaining issue was to determine the amount of attorneys’ fees due to the prevailing party.”

The circuit court noted that the contractual provision for attorneys’ fees was mandatory for the prevailing party. Consequently, the court awarded Dewberry & Davis over $18,000 to prosecute its fee claim. For its successful defense of the counterclaim, Dewberry & Davis sought attorneys’ fees in the amount of $338,356.60. However, the court only awarded $1.00 in attorneys’ fees to Dewberry & Davis, reasoning that C3NS’ counterclaim was made in “good faith” and that “given the nature of the dispute, shifting [the burden of attorneys’ fees] to [C3NS] is not warranted.” Dewberry & Davis appealed that decision.

The Supreme Court’s decision

The Supreme Court reversed and remanded the circuit court’s decision to award Dewberry & Davis only $1.00 for attorneys’ fees for its successful defense of the C3NS counterclaim. As noted by the Supreme Court, when the parties have agreed to a contractual fee-shifting provision, the prevailing party’s burden is “to present a prima facie case that the requested fees are reasonable and necessary” applying several factors previously identified by the Supreme Court. Although the trial court determined that the attorneys’ fees related to the counterclaim were “reasonable,” it did not make any determination that the fees were “necessary.” Consequently, the trial court was instructed to receive evidence and exercise its discretion on that issue.

To add further costs to the equation, because Dewberry & Davis prevailed on appeal, the Supreme Court noted that it could also request “additional attorneys’ fees and expenses . . . for the successful prosecution of this appeal and defense of [C3NS’] assignment of cross-error thereto.” At the end of the day, this case will be very expensive for the non-prevailing party, with potential damages in the hundreds of thousands of dollars, simply because of the attorneys’ fee award.

Conclusion

The general rule in Virginia is that each side pays their own attorneys’ fees in litigation unless a) the parties have contracted to shift the cost of attorneys’ fees to the prevailing party; b) in the case of community associations, when the declaration provides for such a fee-shifting provision; or c) a statutory provision provides for fee shifting. When a fee-shifting provision exists, trial courts are required to award attorneys’ fees that are “reasonable and necessary.” Therefore, it is extremely important for each party to consult with their experienced litigation attorney to consider the costs and benefits of protracted litigation versus alternative dispute resolution.

John Tarley

John is the firm's managing partner and chairs the firm's small business, zoning, and litigation practice areas.

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