By Michael C. Loulakis and Lauren P. McLaughlin
The decision to litigate a dispute is fraught with risk for any business entity. Does the contract contain language helpful to your position? Did your company maintain good project records? Are the project representatives going to make good witnesses?
However, of the many factors to consider in determining whether to initiate litigation, perhaps the most important is the cost of participating.
Almost every party to a dispute wants to know how much money it will spend in attorney fees to attain the desired result. But how often does one think about the potential of not only paying its own fees but the fees of its adversary? Depending on the contract, that is something that indeed needs to be considered.
What is a ‘prevailing party’ clause?
Under what is known as the American Rule, each party bears its own costs to take a case through trial or arbitration, including attorney fees, absent a statute or contract requirement stating otherwise. However, the construction industry has widely accepted the use of “prevailing party” attorney fee provisions in contracts.
With prevailing party clauses, the parties mutually agree that whoever prevails in a lawsuit will have all its fees paid by the opponent. These are also called “fee shifting” provisions because it shifts the obligation to pay fees to the unsuccessful litigant.
These clauses raise the proverbial stakes in that instead of just being concerned about the factual or contractual risks of losing, with a prevailing party clause, both parties must consider the risk of potentially paying the attorneys on both sides, which is as exorbitant as it is unsettling.
Proponents of fee shifting clauses point out that prevailing party clauses are aimed at discouraging frivolous lawsuits and act as a significant consideration in mediation to help settle suits. Opponents of fee shifting clauses argue that there is often no objective standard to measure who prevailed, and as such, the clauses are fertile ground for additional litigation to determine who actually did prevail. Additionally, there are an ever-increasing number of cases in which the attorney fees far exceed the damages awarded. Opponents also argue parties are more likely to settle claims for less than their true value if they are concerned about the threat of having to pay their adversaries’ fees.
What is the standard and how is it applied?
According to Black’s Law Dictionary, the prevailing party is “a party in whose favor a judgment is rendered, regardless of the amount of damages awarded.” The U.S. Supreme Court has stated that “plaintiffs may be considered ‘prevailing parties’ for attorney’s fees purposes if they succeed on any significant issue in litigation which achieves some of the benefit the parties sought in bringing suit.”
You can imagine how easily the waters get murky on this issue. What happens when a party wins on an issue (i.e., a schedule dispute) but doesn’t get awarded nearly the amount of damages it was seeking, such as receiving $50,000 on a $17 million claim? What happens if both parties bring claims and both prevail on certain aspects of the underlying case?
How do courts handle when both parties ‘win?’
The Rhode Island Supreme Court recently grappled with this issue in Clean Harbors Environmental Services Inc. v. 96-108 Pine Street LLC. The Clean Harbors case involved a dispute between a contractor and an owner that contained the following fee provision:
If any party to this Contract brings a cause of action against the other party arising from or relating to the Contract, the prevailing party in such proceeding shall be entitled to recover its reasonable attorney fees and court costs.
The contractor brought claims for breach of contract and unjust enrichment, and the owner countered with its own breach of contract claim for liquidated damages. The trial court awarded damages to both parties on their respective claims. The contractor was awarded $145,500 on the base contract and $284,245 for work performed outside the contract (unapproved change order work). The owner was awarded $62,000 in liquidated damages.
Both parties subsequently moved the court for their respective attorney fees and court costs. Because there was no guiding legal precedent in Rhode Island, the court relied on case law from other jurisdictions, which allows a court considerable discretion on awarding attorney fees when faced with a split decision and a contractual fee shifting provision.
The trial court determined that both parties prevailed on their respective claims and that the award of the $284,245 for extracontractual work was not governed by the attorney fee clause. As such, neither party prevailed, and the court declined to award attorney fees to either party. According to the judge, “both sides won and both sides lost” — hence no fee award was appropriate. The contractor appealed to the Rhode Island Supreme Court.
The Rhode Island Supreme Court vacated the judgment and remanded. As a matter of first impression, the court said the contract’s fee shifting mandate required the trial justice to determine who was prevailing party. In other words, the court was not at liberty to call a “tie.”
In its decision, the Rhode Island Supreme Court looked at precedence from supreme courts in Utah and Florida to determine how each handled murky prevailing party issues. In one case from Utah, the court determined that there can generally be only one prevailing party and that a court must look at a variety of factors such as: “(1) contractual language, (2) the number of claims, counterclaims, cross-claims, etc., brought by the parties, (3) the importance of the claims relative to each other and their significance in the context of the lawsuit considered as a whole, and (4) the dollar amounts attached to and awarded in connection with the various claims.” In essence, there must be a winner based on those factors.
What happens when you win on some but not all claims?
A party that obtains “substantial relief” is deemed the prevailing party in federal litigation even if it does not win on every claim. An example of this occurred in the case of Sommerfield v. City of Chicago, where a jury awarded a plaintiff $30,000 on two counts of a complaint but found against the plaintiff on a third count. The judge had earlier dismissed two other counts by summary judgment.
This decision is instructive as to how courts can be expected to determine who is a prevailing party. Courts look to whether “substantial relief” was awarded and not necessarily what percentage of recovery the plaintiff was awarded as compared to its overall claim. Thus, even if a defendant is successful in defeating most of a plaintiff’s claim, as in Sommerfield, a small recovery by that plaintiff might be sufficient for the court to find it obtained “substantial relief” and is entitled to recover all or some significant portion of its attorney fees.
In some states, even $1 awarded is considered sufficient to be a “prevailing party.” In other jurisdictions, it must be substantial relief relative to the claims a party is pursuing, called the “main issue” approach or “net-prevailing-party approach.”
Do prevailing party fee awards ever seem too severe?
In the case of Signature Flight Support Corp. v. Landow Aviation Limited Partnership, the plaintiff sued to obtain declaratory relief, preventing the defendant from continuing certain actions. It also sued for compensatory damages of more than $4 million.
A Virginia federal court granted declaratory judgment and an injunction in favor of the plaintiff, prohibiting the defendant from continuing certain business practices. The court found in favor of the defendant, however, on the breach of contract and accounting claims because the court concluded the plaintiff failed to prove its damages. The net result of the decision was that the defendant had to stop certain business practices but did not have to pay any of the compensatory damages claimed. At the conclusion of the trial, the plaintiff filed an application for more than $1 million in attorney fees along with a bill of almost $200,000 for costs it expended in the litigation.
After considering the reasonableness of the fees, the court awarded the plaintiff attorney fees in the amount of $1,130,843.60 and costs in the amount of $176,577.34. This case is a striking example of how attorney fees can far exceed any compensatory damages awarded and in fact might be the only financial damages awarded.
Takeaways from the land of fees
One important point to take from this article is to be aware of how your selected jurisdiction will apply the prevailing party clause before agreeing to it (e.g., whether an award of attorney fees will be mandatory or discretionary and which approach the court will use to determine the prevailing party).
A second point is that attorneys should consider drafting prevailing party clauses that actually define the term “prevailing party.” The objective standard for determining prevailing party eliminates the uncertainty of having a judge or arbitrator make that decision on a subjective basis.
For example, you could define prevailing party as a claimant being awarded 51% of its affirmative claims. A more stringent standard would be for a claimant to obtain at least 75% of its total claims and to pay no more than 25% of the other party’s counterclaims. Such a definition would serve the dual purpose of clearly defining the winning party and encouraging realistic initial claims that increase the chance of prevailing under the definition.
The bottom line: If parties are going to have a prevailing party provision in their contracts, they should take the time to negotiate and agree upon what it means to prevail in litigation or arbitration. The consequences of not paying attention to those clauses could be that a fact finder will interpret the fee shifting provision in a manner that causes whoever is thought of as the loser to bear an unanticipated financial burden.
This article first appeared in Civil Engineering Online.