Attorneys’ fees are very often the major driver of any dispute resolution. Fee shifting provisions in contracts are powerful tools to make the parties work together to resolve any dispute amicably. What happens when the fee shifting provision is ambiguous, potentially applying to all disputes or maybe only certain types of disputes? The Oregon Court of Appeals’ recent decision in Adair Homes, Inc. v. Dunn Carney Allen Higgins & Tongue, LLC presents a cautionary tale for lawyers, homeowners, and contractors alike.
In Adair, the Court held the presumption favoring arbitration will not trump competing extrinsic evidence (i.e., evidence outside the 4-corners of the contract itself) of the contracting parties’ intent regarding the scope of an arbitration clause. The dispute in Adair, however, was not about whether a homeowner had to arbitrate claims against a contractor. Nor was the dispute in Adair about whether a homeowner’s failure to arbitrate claims barred the homeowner’s right to prevailing attorney fees. Rather, the dispute in Adair was about whether the contractor’s law firm committed malpractice for not challenging the homeowner’s right to attorney fees when the Dispute Resolution provision in the parties’ contract arguably required arbitration as a prerequisite for any award of fees.
Adair Homes contracted to build a home for Mr. and Mrs. Haynes. After the home was built, the Haynes sued Adair Homes for breach of contract, breach of warranty, and other claims. The Dunn Carney law firm defended Adair Homes. The Hayneses prevailed on their claims against Adair Homes and sought their attorneys’ fees under their contract. The contract, however, contained a Dispute Resolution provision, which included arbitration, as a possible condition to any award of attorneys’ fees. In opposing the Haynes’ petition for attorneys’ fees Adair Homes’ counsel disputed the amount, but not the Hayneses’ entitlement to fees itself. Adair Homes’ counsel construed the Dispute Resolution provision as only applying to “course of construction” disputes, not post-construction disputes.
The Hayneses were awarded their fees. Adair Homes sued its counsel for malpractice, alleging its counsel was negligent in failing to assert Adair Homes’ viable defense to the Hayneses attorney fee petition, that the Hayneses failed to comply with the contractual Dispute Resolution provision before seeking attorneys’ fees. The trial court disagreed with Adair Homes’ position and granted summary judgment in favor of Adair Homes’ counsel. The Court of Appeals reversed, observing that the contract was ambiguous as to whether it conditioned the right to attorneys’ fees on the parties first engaging in the Dispute Resolution provision, which included arbitration, for all claims or just “course of construction” claims. Adair Homes argued that the presumption in favor of arbitration resolves that ambiguity in its favor. The Court disagreed because the parties submitted competing testimony of the parties’ intent that the Dispute Resolution provision applied only to “course of construction” disputes, not post-construction disputes.
[I]n applying our usual principles of contract interpretation to an arbitration provision, we resort to the general policy in favor of arbitration only when a contract is ambiguous and there is no extrinsic evidence of the parties’ intent. Given that parties may not be required to arbitrate disputes that they did not agree to arbitrate, that approach only makes sense.
Consequently, because the contract was “ambiguous as to whether it required arbitration of the disputes in which the Hayneses prevailed and because the parties offered competing extrinsic evidence bearing on that issue, summary judgment was inappropriate.”
There are several take-aways from Adair Homes. For homeowners and home builders, the take-away is that even when you think a contract is clear, ambiguity may still lurk in dark corners. The contract may not be as all-encompassing as you thought in the beginning of the relationship when everyone is working together. Homeowners and builders should always consult with an experienced construction attorney to make sure the contract addresses all the issues you think it does, especially when it comes to dispute resolution and attorneys’ fees. For lawyers, the take-away is that when you have already lost the underlying case, raise every argument in your arsenal to defend the fee claim. Ambiguity is blind and cuts both ways. Raising the threshold argument that there is no right to fees because the contract was ambiguous could have resulted in no fee award. It certainly would have avoided the malpractice claim.