New Arizona Supreme Court Opinion Significantly Impacts Contracts Providing for the Recovery of Attorneys’ Fees

The Court held that statutory language must be applied in determining who the prevailing party is in certain cases involving contractual fee provisions.

It is very common for the parties to a written contract to include a provision stating that in the event a lawsuit is filed concerning the enforcement or subject matter of the contract, the “successful” or “prevailing” party will be entitled to recover his or her reasonable attorneys’ fees. Such a provision is usually intended to serve two useful purposes: first, to discourage a breach of the contract; and, second, to mitigate the expense of litigation.

The “prevailing” party under a contractual fee provision has been generally defined as the “winner” of the lawsuit; that is, the party in whose favor a judgment (for money or otherwise) is ultimately rendered. However, in a recent decision, American Power Products, Inc. v. CSK Auto, Inc., the Supreme Court of Arizona held that the language of a statute, A.R.S. § 12-341.01(A), must be applied in determining who the prevailing party is in certain cases involving contractual fee provisions.

Section 12-341.01(A) allows for the discretionary recovery of attorneys’ fees by the “successful” party in lawsuits that “arise out of a contract.” Thus, if the parties do not include an attorneys’ fees provision in their contract, this statute furnishes another basis for awarding fees in contract cases. In 1999, the Arizona legislature added a sentence to Section 12-341.01(A) stating that “[i]f a written settlement offer is rejected and the judgment finally obtained is equal to or more favorable to the offeror than an offer made in writing to settle any contested action arising out of a contract, the offeror is deemed to be the successful party from the date of the offer and the court may award the successful party reasonable attorney fees.”

Pursuant to this language, the “successful” party can change at different points during the lawsuit, depending upon what settlement offers might be made, thereby complicating the determination of what, if any, net fees might be awarded and to which party. Indeed, it is even possible for the party that ultimately loses the lawsuit to be awarded attorneys’ fees under this statutory language if he or she made a written settlement offer early in the case that turned out to be more favorable than the judgment actually obtained.

In American Power Products, by a 4-1 decision, the Supreme Court held that, unless the parties to a contractual fee provision specify otherwise, the “successful” or “prevailing” party will be defined consistently with Section 12-341.01(A) in order to promote settlements and reduce litigation involving contractual matters. The Supreme Court also held, however, that the parties should have the freedom to choose whether they want that standard to apply: “As long as a contract is legal and enforceable, parties of course may fashion all aspects of an attorney fee provision, including a definition of ‘prevailing party’ different from the statute, in whatever way they see fit.”

In short, American Power Products represents a significant change in Arizona law, one that should be discussed and considered with your attorney whenever an attorneys’ fees provision is proposed for inclusion in any contract governed by the law of this state.