22 October 2023

There's No Tying In Litigation - Factors To Determine The Winner For Fee Shifting Provisions

Deciding whether to include a prevailing party attorneys' fee provision in a contract is important, as doing so has significant risk and cost implications of litigation.
United States Litigation, Mediation & Arbitration
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Deciding whether to include a prevailing party attorneys' fee provision in a contract is important, as doing so has significant risk and cost implications of litigation.

Prevailing party provisions foster dispute avoidance and settlement, requiring parties to engage in a risk analysis that could result in either a significant benefit (reimbursement of fees/costs), or additional, unplanned costs (paying the other side's fees/costs).

This risk analysis exists at all points in a dispute — from claim origination through post-trial briefing. Particularly in cases where incurred attorneys' fees expand disproportionately relative to the underlying claims, a prevailing party provision can become one of the primary drivers to settlement (or impediments if one party refuses to entertain such a risk as part of settlement discussions). No matter the assessment, the existence of a prevailing party provision is an important consideration in any dispute.

But how is the prevailing party determined? What are the factors or considerations? What discretion does the judge or arbitrator have over making the prevailing party determination or declaring a tie?

In a matter of first impression, the Rhode Island Supreme Court in Clean Harbors Environmental Services, Inc. v. 96-108 Pine Street LLC v. J.R. Vinagro Corporation ("Pine Street"), explained the elements a trial judge must consider in identifying the "prevailing party" in litigation involving a contract with a mandatory fee-shifting provision.

In so doing, the Court determined that in most cases, absent compelling circumstances, a trial justice must identify one prevailing party where the contracting parties include mandatory fee-shifting language in the contract. In its ruling, the Pine Street Court provided guidance that could help evaluate whether a prevailing party provision is right for you or your clients.

The Contract and Underlying Action

The underlying action in Pine Street involved a July 2011 demolition contract (the contract) executed by plaintiff J.R. Vinagro Corporation (Vinagro) and defendant 96-108 Pine Street LLC (Pine) under which Vinagro agreed to demolish a parking garage owned by Pine.

The contract contained a time-is-of-the-essence clause requiring Vinagro to complete the work in eight weeks. However, once demolition began, Vinagro discovered oil-contaminated water in the garage's basement, prompting Vinagro to hire Clean Harbors Environmental Services, Inc. (Clean Harbors) for remediation. Vinagro's work was disrupted, and litigation ensued among all three parties in Providence County Superior Court.

By February 2018, the dispute was only between Vinagro and Pine. Following a nonjury trial, the trial justice issued a written decision in favor of Vinagro on its breach of contract and unjust enrichment claims, awarding Vinagro $145,500 on the base contract and $284,245.92 for the extracontractual work, plus prejudgment interest. The trial justice also ruled in favor of Pine on its breach of contract claim and awarded it $62,000 in liquidated damages plus prejudgment interest.

Subsequently, Vinagro and Pine each moved for attorneys' fees and costs based on the fee-shifting provision of the contract that provided:

"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 a proceeding shall be entitled to recover its reasonable attorney fees and court costs." (Emphasis added).

In ruling on the parties' cross-motions for attorneys' fees, the trial court declared a tie.

The trial court concluded that the result as to the prevailing party was "split," as "both sides won and both sides lost" on certain aspects of the underlying case. The trial justice also declined to consider the monetary awards as determinative in identifying a prevailing party.

In making its determination, the trial court relied on case law from other jurisdictions for the proposition where a trial court finds that both parties have prevailed on significant issues, the trial court has discretion to determine that no party prevailed in the litigation and may decline to award attorneys' fees under a provision like the one in the contract. Therefore, the trial court declined to name a prevailing party or to award either party attorneys' fees and costs.

Pine Street and the New Standard for Deciding a Prevailing Party in Rhode Island

The Rhode Island Supreme Court determined that the trial court's finding that no party had prevailed, without a more fact-intensive, case-specific analysis, was erroneous.

First, the Pine Street Court noted the mandatory nature of the prevailing party language "shall be entitled to recover reasonable attorney fees and court costs." The Court discussed that the two parties freely and fairly bargained for the fee-shifting mandate and intended for the prevailing party in any proceeding arising from or relating to the contract to be reimbursed for its attorneys' fees.

Therefore, the trial justice did not have discretion with respect to determining entitlement to attorneys' fees, and instead, was required to resolve the question of who the prevailing party was absent compelling circumstances.

Next, because the appropriate standard for determining the prevailing party in the context of a contract containing a mandatory fee-shifting provision was a matter of first impression, the Court looked to flexible approaches taken by courts in Utah and Florida.

The Pine Street Court adopted the following four-factor, case-by-case standardto be used by a trial justice in deciding the prevailing party:

  1. Contractual language
  2. Number of claims, counterclaims, cross-claims, etc., brought by the parties
  3. Importance of the claims relative to each other and their significance in the context of the lawsuit considered as a whole
  4. Dollar amounts attached to and awarded in connection with the various claims.

While the above standard should allow a trial justice to make a fact-intensive determination as to the sole prevailing party, the Court noted that there may still be compelling circumstances where the trial court determines that neither party prevailed in a breach of contract action.

While compelling circumstances are not clearly defined, the Pine Street Court discussed that compelling circumstances may exist, for example, "when parties battle to a draw such that neither party prevailed in litigation." See,e.g., M.A. Hajianpour, M.D., P.A. v. Khosrow Maleki, P.A., 975 So. 2d 1288, 1289-90 (Fla. Dist. Ct. App. 2008) (discussing that compelling circumstances justified a trial court's decision not to name a prevailing party where the parties "battled to a draw" as defendant defeated plaintiff's complaint and succeeded on his own contractual counterclaims but never collected damages as plaintiff was granted a judgement that damages were speculative, and therefore, unenforceable); KCIN, Inc. v. Canpro Investments, Ltd., 675 So. 2d 222, 223 (Fla. Dist. Ct. App. 1996) (affirming trial court's decision not to designate a prevailing party stating that it is concerned with such awards based on contracts "that fail as a result of fault by both contracting parties.").

Accordingly, the Pine Street Court found that the trial justice erred in finding that neither party prevailed in the litigation without "a more comprehensive, fact-intensive, and case-specific analysis." Therefore, the Court remanded the matter to the Superior Court for a determination of the prevailing party by considering the four-factor standard as well as any compelling circumstances.

What Does the New Standard in Determining a Prevailing Party Mean for You?

As Pine Street demonstrates, most construction cases are complicated, multiparty, multiclaim disputes. The prevailing party analysis to be performed by a trial court must be similarly nuanced and detailed, reflecting the complexity of the underlying dispute. Beyond the additional work required by a trial court, understanding the Pine Street factors allows a party and its counsel to best prepare and position its claims and defenses to better the odds of becoming the prevailing party.

Such strategic decisions should start early on in deciding what counts to assert in a claim letter, complaint, and/or affirmative defenses/counterclaims. Absent a finding of compelling circumstances in a minority of cases, whether through a legitimate draw or a "plague on both your houses" grounds, there should be one prevailing party in Rhode Island where parties have agreed to a prevailing party attorneys' fee provision.

Whether such a provision is right for you or your client is an important consideration. In our experience involving construction matters, fee-shifting provisions work well where a client has institutionalized practices such as: (1) excellent record keeping and project management; (2) trusted business relationships; (3) a culture of first-class business ethics; and (4) purposeful/quantitative business-decision making.

Fee-shifting provisions may backfire where a company's culture embraces risk-taking and/or where documentation policies are less defined. While there are hundreds of extremely successful construction companies that fit into these broad categories, frankly and honestly reviewing the culture and personality of your construction company/client is important in evaluating whether to agree on a mandatory prevailing party provision.

In sum, the Pine Street standard in Rhode Island prohibits a trial court from side-stepping the issue of determining one prevailing party for purposes of a mandatory fee-shifting provision, absent any compelling circumstances.

This is good for contracting parties as it helps accomplish the underlying dispute avoidance/resolution purpose of such provisions. Parties rely on the prevailing party provision, and it can be discouraging if the finder-of-fact does not make such a determination.

Going forward, when faced with a contract dispute with a mandatory prevailing party provision, a Rhode Island trial court has a strong directive to name one prevailing party, and you and your client should consider the four-factor Pine Street test in evaluating whether to include such a provision in the next contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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