In, Tierra Holdings, Ltd. v. Mercantile Bank , a recent First District opinion, Judge James H. Daniel addressed the issue of whether a contractual fee shift provision is suspended following a reasonable settlement offer when the prevailing party fails to “beat” the offer in his final judgment. In May 2004, Mercantile and Tierra entered into a real estate contract providing, among other things, that the parcel of land sold would not be used for a bank or banking related business for five years. There was also a fee shift provision stating that the “’prevailing party’ in any litigation…would be entitled to all costs and expenses including attorney’s fees.” After discovering a bank was being operated on the property in March 2005, Mercantile filed a two-count complaint against Tierra. Tierra responded by serving Mercantile with a proposal for settlement on December 1, 2006. The offer was refused and the case proceeded to trial in August of 2007. The jury returned a verdict in favor of Mercantile awarding damages in the amount of $16,232 for the breach of contract, and both parties moved for attorney’s fees and costs. (1) The court determined that both parties were entitled to attorney’s fees: Mercantile, in the amount of $232,381.62, as the “prevailing party” under the contract, and Tierra, in the amount of $$208,627.95, under § 768.79. This netted to a $23,753.67 award in favor of Mercantile. Tierra appealed, raising an issue of first impression, arguing that a valid settlement proposal under § 768.79 cuts off a prevailing party’s claim for contractual attorney’s fees after the date of the proposal. Fla. Stat. Ann. § 768.79, the statutory fee shift provision, allows for fee shifting when a settlement offer is rejected and the final judgment differs by 25%, more or less, depending on which party proposed the offer. Judge Daniel determined that the policy underlying § 768.79 is different than the policy underlying a contractual fee shift provision and therefore, the court refused to read the statutory language into the contract.

The practical result of this decision is that courts will continue to strictly construe § 768.79, and non-prevailing parties will not be able to avoid their contractual obligations by making a reasonable settlement offer. Attorneys should be aware that § 768.79 will not be considered by courts interpreting standard fee shift provisions and adjust accordingly. There is also the possibility that the legislature responds to this decision by amending § 768.79 to address the issue of contractual fee shifts.

There are several ways attorneys could address the effect of a settlement offer on contractual fee shifts. If the parties desired, they could always draft their agreement to cease the prevailing party’s right to fees at the time of a reasonable settlement offer. This would essentially mirror the language of the statute and resolve any reservations the court would have about altering the intended agreement of the parties. Another approach would be to redefine “prevailing party” while drafting the contract. If the parties adopted a definition similar to the one for mechanic’s liens, for example, the court could consider multiple factors before determining which party prevailed on “significant issues.” This includes not only the settlement offered and how it relates to the final judgment, but also all other relevant factors in an effort to arrive at the most equitable result. Finally, the contract could be drafted in a manner that permits the court to determine a prevailing party for each portion of the litigation and assess fees accordingly. In Tierra Holdings, for example, Mercantile was likely prevailing up until the settlement offer, at which time Tierra Holdings became the prevailing party. This unique method, while similar to the statutory approach, would allow for more flexibility in cases with multiple settlement offers.

Of course, there is always the possibility that the Florida legislature will make adjustments to the statute if they intended for § 768.79 to limit contractual fee shift provisions post-offer. This seems unlikely however given the policies underlying the current statute and the freedom to contract. As the trial court stated: “The sanction under § 768.79, Fla. Stat., still has teeth regardless of whether a prevailing party can recover their post-offer fees and costs. On the other hand, to “cut-off” all attorney’s fees and costs under the contract provision after a proposal for settlement would severely undermine the prevailing party’s ability to obtain complete indemnification as contemplated by the terms of the contract.”

In conclusion, the decision in Tierra Holdings answers a question that many attorneys have been asking themselves for a long time: Does a reasonable settlement offer cut off a prevailing party’s contractual right to fees? In determining that it does not, the First District has brought clarity to the issue, while preserving attorneys’ ability to draft flexible contracts to fit their fee shifting needs. (1) The court also awarded an additional $725,000 for the unjust enrichment claim. The appeals court later overturned this however stating, “[the] unjust enrichment claim was precluded by the existence of an express contract between the parties concerning the same subject matter.”

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