Settling a Claim Sometimes Costs More Than You Think

Your contract contains a provision that permits recovery of your legal costs if the other side fails to perform its contractual obligations. That's a useful tool - particularly in cases where the size of the disputed amount is small enough that, if you have to pay a lawyer to do the work, there is no point in pursuing the claim. However, the right to recover attorneys' fees is often contingent on obtaining a successful judgment in court.

At least that's what an Indiana appellate court recently concluded. In this case, an owner sued a contractor, alleging that the contractor had failed to properly install windows in the construction. The parties' contract provided for recovery of legal costs in the event that a party enforced a legal claim in excess of $5,000. After the general contractor added the window contractor as an additional party, the contractors and the property owner arrived at a settlement of the lawsuit in which the contractors paid the owner $32,000. In exchange, the owner released all claims against the contractor that had been or could have been asserted in the lawsuit except the question of whether the contractor was liable for the owner's legal costs and expenses.

The trial judge concluded that the owner was not entitled to recovery of attorneys' fees because the favorable settlement outcome did not mean that the owner was the "prevailing party" in the lawsuit. The judge agreed with the contractor's argument that, to be the "prevailing party" and recover legal costs, there had to be a judgment in the owner's favor in court.

The owner appealed to the Indiana Court of Appeals, arguing that, under the "catalyst theory," he was entitled to recovery of fees. As the catalyst in bringing the lawsuit, the owner had brought about a voluntary change of the contractor's conduct - payment of the settlement amount - and was entitled to fees under the parties' contract. The Court of Appeals disagreed. The court concluded that Indiana (and many other states) no longer recognize the catalyst theory and, therefore, the owner released his claim to fees when he settled.

The moral here is that, in settling a claim or dispute, a party may unknowingly give up a legal right. Settling lawsuits is often the smart and sensible thing to do - it can save time, money and aggravation. However, sometimes the act of settling waives a right that otherwise might be present. In this case, if the owner wanted to recover fees, he needed to put that term in the settlement agreement.

Cite for attorneys: Reuille v. E.E. Brandenberger Constr., 873 N.E.2d 116 (Ind. Ct. App. 2007)