Winning Litigants Can Still Be Losers, State Justices Rule

In a decision that is expected to encourage more pretrial settlements, the California Supreme Court held Monday that litigants who win at trial after previously rejecting offers to settle may still wind up financial losers.

In a unanimous ruling, the court held that plaintiffs who reject pretrial settlement offers in contract disputes must pay the other side’s attorneys fees and costs if the amount they recover at trial is less or the same as what the defendant had previously offered to settle the case. The ruling will apply to suits involving contracts that contain attorneys fee clauses.

The decision arose out of a contract dispute between Blount Inc., the general contractor for the San Jose Convention Center in the late 1980s, and Scott Co. of California, a subcontractor that handled the plumbing, heating and air conditioning systems for the center.

Scott filed a lawsuit against Blount, accusing it of mismanaging the convention center construction. Scott sought more than $2 million in damages to make up for its losses.

Six months before trial, Blount offered to settle the case for $900,000. Scott refused, demanding $1.5 million.

The trial in Santa Clara Superior Court lasted about six weeks and involved hundreds of exhibits and numerous expert witnesses. At the end, a trial judge found that Blount’s management of the project was at times “inadequate” and negligent and awarded Scott $442,054 in damages.

The trial judge said that Scott would receive the damages, plus interest, and $226,812 in legal costs it bore prior to the defense’s offer of a settlement. However, the award turned into a loss after the judge also said Scott must reimburse Blount $881,635 in fees and costs it incurred after its $900,000 offer was rejected.

A Court of Appeal disagreed, holding that Scott was only responsible for court costs, such as deposition fees, and not Blount’s attorneys fees.

The California Supreme Court, upholding the trial judge’s decision, has put Scott into the red by about $50,000, not counting Scott’s own lawyers’ fees.

“They should have accepted our offer,” said Eliot S. Jubelirer, the lawyer for Blount. “They could have taken the $900,000 six months before the trial and had $950,000 more than they are now going to get.”

He said the Supreme Court’s decision puts teeth into a state law intended to encourage warring litigants to settle.

“Litigants will know that attorneys fees are at stake and those can be quite significant,” Jubelirer said. “That is why I think this is going to result in more settlements.”

Justice Joyce L. Kennard, writing for the court, said that to deny a defendant attorneys fees in such a case would weaken the state law intended to push litigants to settle.

Attorneys for Scott could not be reached for comment.