In today’s design and construction industry, a party must take into account attorneys’ fees and related court costs in the event that a business dispute ends up in a lawsuit.  Fees and costs can become a significant portion of the amount in dispute, and the prospect of their recovery, or exposure to having the pay the opposing party’s fees and cost, may influence each party’s actions in litigation.

A recent change in the Arizona statute on the recovery of attorneys’ fees in contract litigation can dramatically shift the burden of litigation costs in any particular case.  There has long been a statute allowing the prevailing party to recover reasonable attorneys’ fees and court costs at the discretion of the court.  If you won a judgment, you would probably receive an award of attorneys’ fees, and if you lost, you probably had to pay the other side’s attorneys’ fees in addition to your own.

Recently, however, this statute has been amended to include a provision stating, “If 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 attorneys’ fees.”

At first, this change seems innocuous enough because it continues to leave to the Court’s discretion the award of reasonable attorneys’ fees and costs.  But the revision adds a provision meant to encourage early settlement of cases before they reach the trial stage.  It may sometimes accomplish that goal, but it also adds a new twist into the analysis of a party’s claim.

Consider an example.  Early on in litigation, a defendant makes a written settlement offer and the plaintiff rejects it.  The matter then proceeds to trial and the court awards judgment to the plaintiff, but in an amount slightly less than that of the prior settlement offer.  Although the plaintiff won a judgment requiring the defendant to pay money, the defendant is now defined as the “successful” party entitled to recover its reasonable attorneys’ fees and costs from the plaintiff from the date that the written settlement offer was made!

So, a defendant now has an opportunity to minimize the risk of an adverse award of attorneys’ fees, and can increase the chances of recovering fees, by making an early settlement offer.  Of course, the plaintiff can also use the statute to become the successful party by making an early settlement offer that is less than what he expects to recover at trial.  This may force the plaintiff, however, into settling the case for less than he or she is entitled to.

If you are usually the plaintiff in contract litigation, you probably will not like this change.  Fortunately, you can avoid application of the statute altogether by including a properly drafted clause in your contract forms.  They should not only provide for the recovery of attorneys’ fees by the successful party in any litigation, arbitration or mediation, but should also state that the award will be determined in accordance with the contract provision and not pursuant to the statute.  This is a good time to review your contract forms with your attorney to see that such a provision is included.