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Loser-Pays Provisions Simplify Collections

Mar 1, 2006 12:00 PM

Most major contract documents in the construction industry do not contain “loser-pays” provisions, revealed the American Subcontractors Association (ASA) in a recent report This reality often forces specialty trade contractors to incur additional expenses when forced to hire attorneys to collect payments for properly performed work. Urging contractors to consider adding specific language to subcontract agreements that spells out who will pay attorney feeds in case of disputes, a new white paper published by ASA can help protect electrical contractors.

“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.”

The current legal system generally does not provide subcontractors relief from the costs of collection. Following are some tips for contractors interested in increasing the clarity of their contracts.

Take the initiative

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.

Get to know the law

Even in the few states that do have loser-pays statutes, the laws are not always effective. For example, while California's prompt payment law, applicable to private construction, mandates that attorney's fees “shall” 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. Some even limit awards of attorneys' fees to cases where the unpaid subcontractor can prove “bad faith.” Therefore, most subcontractors are unable to recoup attorneys' fees in a collection action absent a contract provision requiring such an award.

Get it in writing

Unless you're willing to write off some debts because they are too costly to collect, your best option is to include specific language, a loser-pays provision, in the contract that shifts the cost of dispute resolution and collection to your customer. Taking this step can make it economically feasible for you to collect all debts for work performed under every agreement you sign.

To learn more about how to recover attorneys' fees relating to collections disputes, visit www.asaonline.com and click on “Stand Up! For Subcontractors” for more information.

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© 2012 Penton Business Media, Inc.

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