Who Is The Prevailing Party? (Ariz. Sup. Ct. Changes Analysis In Awarding Attorneys' Fees In Arizona Contract Disputes)

Arizona is among a handful of states to have a statute awarding fees to the successful party in litigation arising out of contract.  See A.R.S. Sec. 12-341.01 et seq.  The statue, however, defines a prevailing party based on the settlement offers and rejection of settlement offers made prior to judgment.

For example, in a contract dispute involving a $1,000,000 damage claim by the plaintiff, if the defendant, on January 1, makes an offer to settle for $700,000 and the plaintiff rejects that offer, unless the plaintiff recovers more than $700,000 at trial, the defendant will be the "successful party" under the Arizona statute for purposes of an attorney fee award and can recover its attorneys' fees from January 1 forward.

Where a written contract includes a provision for award of attorneys' fees, the contract typically controls.  However, most such contracts simply state that the "prevailing party" is entitled to its attorneys' fees and costs.  Until recently, Arizona courts awarding fees under such provisions determined the "prevailing party" using a "totality of litigation" test - irrespective of prior settlement offers (which could be used to determine the reasonableness of a fee award).

Applying the "totality of litigation" analysis to the example above, the plaintiff would be the "prevailing party" because it recovered more than the defendant - regardless of the prior settlement offers.

The Arizona Supreme Court's May 2017 ruling in American Power Products, Inc. v. CSK Auto, Inc. changes the analysis of "prevailing party" in cases with written fee award provisions.  Unless the written fee provision defines "prevailing party," Arizona courts are to apply the definition of "successful party" from ARS 12-341.01(A), which means that evaluation of settlement offers and early case analysis are more critical than ever.

It also means that unwary or unreasonable litigants can win the battle (by being vindicated with a judgment), but lose the war (by owing more attorneys' fees to their opponent than the value of their judgment), if they do not property evaluate settlement offers before trial.