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When is a Win a Win?

By Joseph E. Tierney IV

A recent State of Wisconsin Court of Appeals case, Falk v. Droegkamp Sales & Service (App Case. No. 2010AP001468, August 17, 2011) focused on a very typical contract provision known as a “prevailing party” clause and whether either party “prevailed”. The real lessons from this case appear to be (a) that parties should be careful when expanding the claims in a case; and (b) that the prevailing party language typically used has some inherent ambiguities.

In many contracts, the parties insert a provision that, generally speaking, states that if there is a suit between the parties, the “prevailing party” will have the right to recover its attorneys fees from the non-prevailing party. The insertion of this type of provision in a contract is necessary because Wisconsin operates under the “American Rule” where parties are generally responsible for their own attorney fees unless recovery of fees is expressly allowed by contract or statute. Other countries, most notably the United Kingdom, operate under the “English Rule” where the loser pays the winner’s attorneys fees. Note: we are talking about attorneys fees as opposed to “costs”. “Costs” in Wisconsin are governed by Chapter 814 of the Wisconsin Statutes and are awarded to the “successful party.”

Contract provisions shifting the “American Rule” to the “English Rule,” or a rough facsimile thereof, serve a number of goals. The provision exists to encourage parties to only file lawsuits that they believe they have a high probability of winning. The provision also serves as a deterrent to parties who seek to encourage a lawsuit or breach a contract by placing the likely burden of the opposing party’s attorneys fees on them as well. From the standpoint of the courts, these provisions are supposed to reduce the burden on the system by deterring litigation. From the standpoint of the parties, these provisions are designed to shift the cost-benefit analyses of each party. There have been many excellent books and articles written on whether the American Rule works in practice to achieve these goals, such as those by Judge Richard A. Posner and various analysts and critics such as John Donahue. For a discussion of effectiveness, I recommend those sources.

In this case, the question was whether either party really “prevailed”. The initial case centered around a lease dispute in which the tenant (Falk) sought to recover its security deposit from the landlord (Droegkamp). The landlord counterclaimed on a variety of grounds and generated a lengthy trial. The trial court determined that both sides “sort of won”. It dismissed the tenant’s claim for recovery of the security deposit, but also rejected the Landlord’s counterclaims. The court then went on to determine that neither party really “prevailed” so both parties would bear their own attorney’s fees and costs. Both parties appealed. The Court of Appeals upheld the trial court.

The landlord contended that “prevail” under the terms of the lease meant the party who succeeds on the complaint. Asserting that these provisions exist to allow parties to make cost benefit analyses with respect to whether to proceed with a suit, the landlord argued that, since it was successful in defending against the tenant’s complaint, it prevailed. The tenant argued that, although the landlord successfully defended against its complaint, the tenant successfully defended against the counterclaim as well. In effect, the tenant argued, the result was a “tie”. The Court, following an earlier case, Borchardt v. Wilk, 156 Wis. 2d 420,427 (456 N.W.2d 653 (Ct. App. 1990), essentially agreed with the Tenant. In Borchardt, the Court faced a similar case where plaintiff succeeded on its complaint and defendant on its counterclaim. The Court in that case reduced the attorney’s fees in proportion to the amount the plaintiff recovered less the amount the defendant recovered. In this case, the Court went a little farther. It found that the counterclaims were weak and “ramped up” the “simple” dispute to a larger litigation that raised attorney’s fees and costs for all parties. The Court felt that awarding the landlord attorney’s fees would “encourage others to bring excessive and unsubstantiated claims”. In effect, the landlord lost its right to any proportionate award because its conduct in adding the counterclaims was questionable. In addition, adding salt to the wound, the Court noted that if the landlord had not brought the counterclaims, there “would have been no dispute that, as the prevailing party, it would have been entitled under the lease to reasonable attorney fees.” As discussed above, the Court has an interest in reducing its caseload and the parties an interest in appropriately balancing their risk and reward. The effect of this decision is to further press the risk and reward analysis.

There are two lessons here. First, prevailing party clauses have some ambiguity built in. Most such clauses do not define what it means to prevail-and such a definition may be problematic. Does it mean a party wins all of its claims? A majority of claims? Is majority measured by number or amount? Careful drafting may be able to refine the definition of prevail, but such a narrow definition may also exclude certain claims and recoveries. Second, parties relying on a prevailing party clause should consider very carefully the additional issues they raise at trial and the credibility of those positions. Since the primary goal of the courts is to reduce the amount and duration of litigation, avoiding the backlash experienced by the landlord here is important.

For more information, please contact Joseph E. Tierney or your Davis & Kuelthau, s.c. attorney.