Who Pays Attorney's Fees? The American Rule and Its Texas Exceptions

The default: everyone pays their own lawyer

Texas, like every American jurisdiction, starts from the American rule. A party may recover attorney's fees from the other side only when a statute or a contract between the parties authorizes it. Winning is not enough. A business that proves fraud and recovers every dollar it lost still pays its own lawyer unless one of the exceptions below applies.

The practical consequence is that fee recovery is a pleading and strategy question from the start. The same facts can often be framed as a contract claim that carries fees or a tort claim that does not, and the choice of claims shapes both the budget and the settlement value.

Chapter 38: fees on contract claims

Section 38.001 of the Civil Practice and Remedies Code allows a person to recover reasonable attorney's fees, in addition to the amount of a valid claim and costs, if the claim is for rendered services, performed labor, furnished material, freight or express overcharges, lost or damaged freight, killed or injured stock, a sworn account, or an oral or written contract. The contract category covers most business-to-business disputes over payment and performance.

Three conditions attach. The claimant must prevail and recover damages on the claim; a party who proves breach but no damages recovers no fees. The claim must be presented to the opposing party or its agent, and payment must not have been tendered within 30 days after presentment (Section 38.002). And the defendant must be one from whom fees can be recovered: since the 2021 amendment, Section 38.001 reaches an individual or an "organization" as defined in the Business Organizations Code, which includes corporations, limited liability companies and partnerships, while excluding certain quasi-governmental entities. Fees under Chapter 38 are generally available only to the claimant; a defendant who defeats a contract claim recovers nothing under this chapter.

The companion article on recovering attorney's fees in a Texas contract case works through presentment and the proof in detail.

Fee clauses in the contract

Most commercial contracts carry their own fee provision, and Texas courts enforce them as written. A clause that awards fees to the "prevailing party" is two-way: whoever wins, plaintiff or defendant, recovers. A clause written for one side only (common in leases, loan documents and guaranties) is enforced as drafted. The clause can also expand recovery beyond Chapter 38, for example by covering a defendant who successfully defends, by covering tort claims arising from the contract, or by including appeal and collection costs.

Read the clause before deciding whether to sue, and before deciding how to defend. A two-way prevailing-party clause means a weak claim risks paying the other side's lawyer as well as your own.

Statutes that shift fees in business disputes

Two of these deserve a warning. The Theft Liability Act's two-way, mandatory fee provision means a theft claim added to a business case for pressure can cost the plaintiff the defendant's fees if it fails. And the Declaratory Judgments Act cannot be used simply to bolt a fee claim onto a dispute that is really a contract or tort claim already before the court; courts look at whether the declaration adds anything. Fee awards in trade secret and trademark cases covers the TUTSA and Lanham Act standards.

Claims that carry no fees

Common-law fraud, negligent misrepresentation, breach of fiduciary duty, tortious interference and conversion do not come with a fee award of their own. A plaintiff who recovers only on those theories pays its own lawyer, though fee forfeiture or disgorgement remedies in a fiduciary case can sometimes reach what the defendant was paid. This is why a litigator pleading a partner dispute or a fraud case looks hard for a contract claim, a statutory claim or a fee clause to stand alongside the tort.

Sanctions and settlement offers

Sanctions for groundless pleadings

Texas Rule of Civil Procedure 13 and Chapter 10 of the Civil Practice and Remedies Code allow a court to award fees as a sanction against a party or lawyer who signs a pleading that is groundless and brought in bad faith or for harassment, or that lacks a reasonable basis in law or fact. These awards are the exception, not a routine way to recover fees, and courts require specific findings. In federal court, Rule 11 plays the same role.

Offers of settlement under Chapter 42 and Rule 167

Chapter 42 of the Civil Practice and Remedies Code, implemented by Rule 167, lets a defendant trigger a fee-shifting mechanism by filing a declaration that the settlement procedure applies. After that, either party can make a formal offer. If the offer is rejected and the judgment turns out to be significantly less favorable to the rejecting party than the offer (less than 80 percent of a rejected claimant's offer, or more than 120 percent of a rejected defendant's offer), the rejecting party owes the offering party's litigation costs incurred after the rejection, including reasonable attorney's fees, subject to a statutory cap. The procedure is used less than its drafters expected but is a real lever in business cases with well-defined damages.

How fees must be proven

An entitlement to fees is not an award. In 2019 the Texas Supreme Court, in Rohrmoos Venture v. UTSW DVA Healthcare, held that a fee claimant must prove the reasonableness and necessity of the fees with evidence of the particular services performed, who performed them, approximately when, the reasonable time required, and the reasonable hourly rate for each person. Those figures produce a base lodestar that is presumed reasonable; adjustments up or down require evidence of considerations not already reflected in it. Generalized testimony that the fees were reasonable is no longer enough. Billing records are not strictly required but are the usual proof, and fees must be segregated between claims that carry fees and claims that do not, unless the work is intertwined.

For the client, this means that recoverable fees depend on records the lawyer keeps from the first day, and that an award may be less than what was actually billed.

Federal court

Federal courts apply the same American rule and the same exceptions when they hear Texas state-law claims. A motion for attorney's fees under Fed. R. Civ. P. 54(d)(2) must be filed within 14 days after the entry of judgment unless a statute or court order says otherwise. Federal statutes carry their own fee provisions, including the Lanham Act for exceptional trademark cases and the Defend Trade Secrets Act on terms parallel to TUTSA.

Example

Suppose a Dallas software vendor sues a customer for an unpaid license fee and adds fraud and Theft Liability Act claims because the customer kept using the software after nonpayment. The license agreement has a two-way prevailing-party fee clause. If the vendor wins on the contract, fees follow from both the clause and Chapter 38. If the jury rejects the theft claim, the customer is the prevailing party on that claim and the mandatory, two-way provision of the Theft Liability Act gives the customer its fees on it. The fraud claim adds no fees either way. Pleading the case meant weighing each claim's fee consequence, not just its merits.

Tina Wysk evaluates fee exposure and fee recovery at the start of every commercial case, because they change what a claim is worth and what a defense costs.