Arizona Supreme Court rules that the trial court must decide who the “prevailing party” is when awarding fees under contract.

In American Power Products, Inc. v. CSK Auto, Inc., CV-16-0133-PR, filed May 11, 2017, the Arizona Supreme Court examined the interplay between a contractual fee award provision and A.R.S. §12-341.01(A), which provides that if a written settlement offer is rejected and the judgment finally obtained is equal to or more favorable to the offeror in a contested action arising out of a contract, the offeror is deemed to be the successful party from the date of the offer and may seek an award of attorneys’ fees.    

The underlying contract between the parties contained a provision which provided that “the prevailing party shall be entitled to recover…reasonable attorney’s fees.”  However, the contract did not define “prevailing party.”  American sued CSK for, among other things, breach of contract and sought more than $5 million in damages.  CSK counterclaimed and sought nearly $1 million in damages.  Several months prior to trial, CSK served American with an offer of judgment in the amount of $1,000,001.  American did not accept the offer and the jury awarded American $10,733 at trial.

The trial court ruled that American was the “prevailing party” despite having only been awarded a small fraction of the millions in alleged damages it sought at trial.  The trial court awarded American $775,000 in attorneys’ fees and denied CSK’s request for Rule 68(g) sanctions.  The Court of Appeals affirmed the fee award, but reversed and remanded with instructions on the Rule 68 sanction issue.  The Arizona Supreme Court granted review “because the interplay between A.R.S. §12-341.01 and contractual fee provisions presents legal issues of statewide importance that are likely to recur.”

The Court affirmed that A.R.S. §12-341.01 does not alter, prohibit, or restrict contracts that provide for attorneys’ fees and that the statute may not be construed to do so.  However, the Court stated, “to the extent prior case law broadly precludes application of §12-341.01 whenever the parties’ contract contains an attorney fee provision, regardless of its content, scope, and other provisions in the contract, we disagree.  Rather, §12-341.01 ‘is inapplicable by its terms if it effectively conflicts with an express contractual provision governing recovery of attorney’s fees.’”  Thus, §12-341.01 applies to any contested action arising out of a contract, “to the extent it does not conflict with the contract.” 

The Court was able to harmonize the seeming conflict regarding the language of the contractual provision that provided for an attorneys fee award to the prevailing party; the trial court determined that the prevailing party was American by utilizing the totality-of-the-litigation test and the provision of §12-341.01(A) – which provides that the offeror who obtains a judgment equal to or better than a written offer is the “prevailing party” after the date of the offer.  The Court recognized that there could be two prevailing parties and stated that such a result was implicitly contemplated and permitted by §12-341.01.  Thus, although American was the “prevailing party” on the whole – since the judgment it obtained was more favorable to CSK than its written offer of judgment, American was not permitted to recover any fees incurred after the date of the offer.