The Texas legislature recently passed a significant statutory amendment that enables a party suing for breach of contract to recover attorneys’ fees from any breaching party, whether an individual or other legal entity.
Texas House Bill 1578, which was signed by Governor Greg Abbot on June 15, 2021, amends Chapter 38 of the Texas Civil Practice and Remedies Code, which previously only permitted a party to recover attorneys’ fees from individuals and corporations, but not limited liability companies, limited partnerships or other legal entities. Similar to most other states, Texas has long abided by the “American Rule,” by which fee awards are prohibited unless explicitly provided for by contract or statute. A Texas-sized exception to this general rule is found in § 38.001 of the Texas Civil Practice and Remedies Code, which provided “that a person may recover reasonable attorney's fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for . . . an oral or written contract."
Based on the prior version of the statute and its stated application only to claims against “individuals and corporations,” the Houston Court of Appeals in Alta Mesa Holdings, L.P. v. Ives previously held that the plaintiffs could not recover attorney's fees against an LLC under § 38.001. Other courts in Texas have similarly held that § 38.001, as written, did not apply to legal entities other than corporations.
In the face of these strict judicial constructions of the statute, and recognizing the lack of any logical rationale for permitting parties to recover attorneys’ fees from individuals and corporations, but not LLCs or partnerships, the Texas legislature amended § 38.001 to replace “corporation” with “organization,” the latter including “a corporation, limited or general partnership, limited liability company, business trust, real estate investment trust, joint venture, joint stock company, cooperative, association, bank, insurance company, credit union, savings and loan association, or other organization, regardless of whether the organization is for-profit, nonprofit, domestic, or foreign.”
The amended statute now enables plaintiffs to recover attorney’s fees from most legal entities, not just corporations. This is significant because, under § 38.001, parties to a contract may recover attorneys’ fees from a breaching party even in the absence of a contractual fee-shifting provision in the contract. The updated version of Chapter 38 will now broadly apply to a variety of agreements that may have been negotiated to expressly exclude such provisions.
As a result of this amendment, parties and their counsel must evaluate whether, depending on their unique legal objectives, their contracts should be governed under Texas law (including Chapter 38) or whether to include an express waiver of Chapter 38 in their agreements.
The amended statute will take effect on September 1, 2021, and will apply only to an award of attorney’s fees in an action brought on or after this date.