"Prevailing Party" Clarified by Arizona Supreme Court

Arizona is one of very few jurisdictions that has a statutory provision that allows a court to award reasonable attorneys’ fees to a party that prevails in an “action arising out of contract.” Until now, however the has been an open issue regarding the "prevailing party" language.

The relevant statute, A.R.S. § 12-341.01, also says that a party is the “successful party” if it makes a written settlement offer during the dispute that is rejected, and then beats the offer at trial. In other words, in a case where the only provision related to attorneys’ fees is § 12-341.01, a party “prevails” so long as it beats the best settlement offer it makes in the case. 
 
At the same time, many Arizona contracts contain a provision that awards the “prevailing party” attorneys’ fees. Most of these provisions are pretty basic and fail to either define “prevailing party” or say anything about how settlement offers during the case will be considered in determining which is the prevailing party. This gave rise to the open question in cases where a contract contained “prevailing party” language as to whether a settlement offer would control the outcome. The Arizona Supreme Court just answered that question in the affirmative in a newly published case, American Power Products v. CSK Auto, 761 Ariz. Adv. Rep. 33. 
 
In American Power Products, the Plaintiff sued for over $10 million in damages on a contract claim with a “prevailing party” provision in it. The Defendant also filed a counterclaim. During the litigation, Defendant offered Plaintiff $1,000,001 to settle all claims, an offer that was rejected by the Plaintiff. At trial, the jury only awarded Plaintiff $10,733. Nevertheless, the trial court determined Plaintiff was the “prevailing party” under the contractual fee provision and awarded attorneys’ fees, costs and interest to Plaintiff of $861,000. The Arizona Court of Appeals agreed with this holding.

The Arizona Supreme Court reversed this decision, however, finding the statutory definition of “successful party” provided in § 12-341.01 modified the contractual provision. As a result, because the final judgment with fees ($861,000) was less than the settlement offer ($1,000,001), the Court held that Defendant was the “prevailing party,” entitled to recover attorneys’ fees from the date of the offer forward. The Court's decision focused on the fact that: (1) the contract did not define the term “prevailing party;” and (2) the contract stated generally that Arizona law applied. The Court, therefore, held that § 12-341.01’s definition of “successful party” applies because the contractual fee provision did not directly contradict § 12-341.01.

There are two takeaways from American Power Products. First, if you do not want to be subject to the definition of “successful party” contained § 12-341.01, you should expressly define the term “prevailing” or “successful” in your contract to exclude this definition. Second, during contract related litigation, if there is a contractual attorneys’ fees provision, you must be aware that written settlement offers may dictate which side recovers its attorneys’ fees at the end of the case and tailor your strategy accordingly.