In the energy sector, many contracts contain Texas choice of law provisions, or are performed in Texas, which means that Texas law probably applies. The conventional wisdom in Texas is that a prevailing party can recover its attorney’s fees in a breach of contract action. A series of recent cases have held that this is not always the case.

Texas follows the American Rule, which provides that litigants may recover attorney’s fees only if specifically provided for by statute or contract.1 Unlike many other states, Texas has traditionally allowed a successful plaintiff in a breach of contract case to recover its attorney’s fees. Most Texas practitioners are well aware that, under Texas Civil Practice and Remedies Code Section 38.001, attorney’s fees are recoverable if the claim is for breach of “an oral or written contract” or certain other limited claims.

However, the assumption that attorney’s fees can be recovered against any business entity has recently been challenged with success.

The predecessor statute to Chapter 38 was article 2226 of the Texas Revised Civil Statutes. Article 2226 provided that fees could be recovered against a “person or corporation.” Because Texas law used the term “person” to include individuals and corporate entities, there are numerous cases allowing the recovery of attorney’s fees against various business entities, including partnerships.

In 1986, when the legislature recodified article 2226 into Chapter 38, it supposedly did not intend to make substantive changes to the statue. However, when the statute was recodified, the broad word “person” was changed to the much more narrow word “individual.” The revisor ’s note indicates that the term “person” was changed to “individual” primarily to avoid application of Chapter 38 to governmental entities.2

Despite the stated legislative intent, cases interpreting the new language have found that the recodification of the statute amounted to a major change. In 1997, Judge Urbom, in the U.S. District Court for the Northern District of Texas, interpreted this change to mean that Chapter 38 does not allow a successful plaintiff to recover attorney’s fees against a limited liability partnership.3 He reasoned that when the statute was recodified, the change from person to individual narrowed the types of entities that could be liable for attorney’s fees under Chapter 38. Despite the significance of this major change to Texas law, this decision received very little attention until recently.

In February 2014, the Houston Fourteenth Court of Appeals followed this same reasoning and agreed that fees could not be recovered against a partnership.4 The Texas Supreme Court denied the petition for review. Then, in March 2015, Judge Sidney Fitzwater, in the U.S. District Court for the Northern District of Texas, held that this same reasoning applies to a limited liability company.5 The final nail in the coffin came in April of this year when the Houston Fourteenth Court of Appeals issued an opinion in line with Judge Fitzwater holding that attorney’s fees are not recoverable against a limited liability company.[6]

There are numerous Texas cases, both state and federal, that have upheld awards of attorney’s fees against partnerships and limited liability companies based on Chapter 38. However, it does not appear that this issue was raised in any of those cases. Thus, the cases that have directly addressed the issue of whether Chapter 38 allows for the recovery of attorney’s fees against a partnership or limited liability company have held that it does not.

Obviously, if the contract has a prevailing party provision, then that could allow for the recovery of fees, depending upon the wording. There are also several other statutes that do allow for the recovery of attorney’s fees.

There was a failed effort during the last Texas legislative session to correct the statute. HB230 would have amended Chapter 38 to clarify that attorney’s fees may be recoverable from “other legal entities” for certain claims, including breach of contract claims. HB230 did not make it past the Texas Senate. With HB230 left pending in the Senate Committee on State Affairs, the current state of the law will likely remain unchanged, at least until the legislature meets again in 2017.

While this change in the law appears to be inadvertent and has no real logical basis, it is now the law in Texas. Based on these recent state and federal court opinions, it appears that Chapter 38 only provides for the recovery of attorney’s fees against corporations and individuals. To be clear, the benefit of Chapter 38 applies to all “persons” but the potential fee-shifting burden of the statute only runs to individuals and corporations.

These changes affect attorneys who are negotiating contracts in Texas, as well as those litigating them. For attorneys who are negotiating contracts, special attention should be paid to whether a prevailing party provision should be included in the contract. For example, if your client is not an individual or corporation (e.g., an LLC or a partnership), and the adverse party is a corporation, then it is to your advantage to not include a prevailing party provision. This is because in a breach of contract lawsuit, your client could recover fees but your opponent could not. Of course, if you are on the side representing the corporation, then you should insist on a prevailing party provision.

Attorneys representing clients in active litigation with breach of contract claims should consider whether a claim for attorney’s fees is supported in light of these recent decisions. A plaintiff in a breach of contract case may wish to consider other causes of action (e.g., declaratory judgment) that allow for the recovery of attorney’s fees. In addition, settling parties in any case would be wise to consider the implications of these attorney’s fees cases. For example, if your client is a limited liability company, and you are settling a claim by an individual, think long and hard before including a prevailing party provision!