Contracting for Legal Fees - There is Only One "Prevailing Party."
A recent Arizona Supreme Court decision will impact how you draft a legal fees provision for a prevailing party. Make sure you are in the know!
Prevailing Party Entitled to Legal Fees....But, Who is the "Prevailing Party"?In Arizona, A.R.S. 12-341.01(A) permits a court to award reasonable attorney fees to the prevailing party in a contract dispute. Pursuant to this statute, if there is a written settlement offer by one party that is rejected and that party later obtains an equal or more favorable judgment, the offering party is deemed to be the prevailing party. That's easy enough. But what happens when the offering party obtains a less favorable judgment than the settlement the party offered?
Just the Facts: American Power Products, Inc. v. CSK Auto, Inc., CV2016-0133-PR (March 23, 2017)In American Power Products v. CSK Auto, plaintiff and defendant entered into a contract where plaintiff agreed to sell certain items to defendant on an open account. The contract between the parties included the following standard provision concerning an award of legal fees: "(f) Attorneys' Fees. In the event either party shall commence or be required to defend any action or proceeding against the other party arising out of this [Agreement], the prevailing party shall be entitled to recover from the other party its reasonable attorneys' fees and costs through all levels of proceedings as determined by the court."
As in most contracts, the term "prevailing party" was not defined. The contract was to interpreted under Arizona law.
Plaintiff ended up suing defendant for breach of contract, seeking more than $5 million in damages. Defendant asserted various defenses and a counterclaim seeking damages in the amount of $950,000. Before trial, defendant served plaintiff with a settlement offer (by way of an offer of judgment under A.R.C.P. 68) pursuant to which, defendant would pay plaintiff $1,000,001 to settle all claims and counterclaim. Plaintiff rejected the offer. At trial, defendant's counterclaims were dismissed and judgment was entered in favor of plaintiff in the amount of $10,733 - a FAR cry from the $5 million it originally sought. And, sadly for plaintiff, substantially less than the $1 million settlement offer. Both parties claimed to be the prevailing party and both parties sought attorneys fees. But, who really won? Who was the "prevailing party"?
And the Winner Is....The trial court said plaintiff won based on the fact that plaintiff was awarded a monetary judgment and defendant was not. The trial court then awarded plaintiff $775,000 in attorneys fees, not the nearly $2 million plaintiff had requested (ouch!). The court of appeals affirmed.
On appeal to the Arizona Supreme Court, the Court focused on the last sentence of A.R.S. 12-341.01(A), which prohibits the statute from being interpreted to alter any contractual provision for attorney fees. The Court held that A.R.S. 12-341.01(A) is applicable in any action arising out of contract to the extent that the terms of A.R.S. 12-341.01(A) does not conflict with the express terms of the contract. So, for example, if a contract between A and B permits A to recover its attorney fees and not B, then A.R.S. 12-341.01(A) would not apply to party A, but would apply to B.
The Court held that the general rule in Arizona is "that contracts are read to incorporate applicable statutes," even if those statutes are not mentioned in the contract. In this case, the Court held that A.R.S. 12-341.01(A) did not conflict with the contract language between plaintiff and defendant (because "prevailing party" was not defined) and therefore, A.R.S. 12-341.01(A) was incorporated into the contract. Pursuant to the statute, defendant was the "prevailing party" because plaintiff rejected a pretrial settlement offer from defendant that was more favorable than the final judgment obtained by plaintiff.
What Does this Mean for Me?The new opinion from the Court means simply, when drafting your contracts, be sure to define in the contract who you intend to be awarded attorney fees in the even there is a dispute. Define who the prevailing party is, or A.R.S. 12-341.01(A) will do it for you.
Please contact Danielle K. Graham ([email protected]) to make sure your contracts protect your rights and insure you don't have to pay unnecessary legal fees.