By Gary A. Watt
Please visit the MCLE section of the Daily Journal's website to take this test.
In California, contractual attorney fee awards are governed by Civil Code Section 1717. Section 1717(b)(1) states that "the party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract." (Emphasis added.) But what exactly is the "action on the contract"?
The objective of this article and self-study test is to familiarize readers with the meaning of "action on the contract" for purposes of Civil Code Section 1717. Readers will learn whether resolution of preliminary skirmishes can decide an action, and whether the winner of early battles in litigation can obtain a contractual attorney fee award even though the merits of the contract dispute remain unresolved.
The state Supreme Court has interpreted Section 1717 as creating two prevailing party situations: those giving rise to an award of fees as a matter of right, and those when trial courts retain discretion to award fees. Hsu v. Abbara, 9 Cal. 4th 863 (1995). The former includes situations when the court renders a decision that is "purely good news for one party, and purely bad news for the other [party]." 9 Cal. 4th at p. 876; see also De La Cuesta v. Benham, 193 Cal. App. 4th 1287 (2011) (although not a simple, unqualified win, lopsided result entitled party to fees). The latter arises when "the results of the litigation are mixed." Hsu v. Abbara. When that happens, "the court may also determine that there is no party prevailing on the contract." Section 1717(b)(1).
So what about early battles and fee awards? Section 1717(b)(1) also states that "[t]he court ... shall determine who is the prevailing party on the contract ... whether or not the suit proceeds to final judgment." Generally speaking, however, courts have not interpreted that language to support interim fee awards. Rather, fees have generally been awarded upon resolution of the action - even if such resolution comes early on and is procedural in nature. Kandy Kiss of Cal. v. Tex-Ellent, 209 Cal. App. 4th 604 (2012) (fees awarded after dismissal for lack of subject matter jurisdiction); PNEC Corp. v. Meyer, 190 Cal. App. 4th 66 (2010) (fees awarded after dismissal on forum non conveniens grounds); Otay River Constructors v. San Diego Expressway, 158 Cal. App. 4th 796 (2008) (fees awarded after defeat of petition to compel arbitration when no civil action had been filed).
But some decisions have rejected fee awards for early victories. Frog Creek Partners, LLC v. Vance Brown, Inc., 206 Cal. App. 4th 515 (2012) (no fees for defeating petition to compel arbitration filed in existing civil action because moving party did not ultimately prevail); Estate of Drummond, 149 Cal. App. 4th 46 (2007) (Drummond II) (no fees awarded for defeat of probate court lawyer's petition for fees even though the probate action was final).
The common thread appears to involve interpreting Section 1717(b)(1)'s phrase "action on the contract." Section 1717 does not define the term and "courts generally treat the term 'action' ... as referring to the whole of a lawsuit rather than to discrete proceedings within a lawsuit." Frog Creek. Nevertheless, Frog Creek concluded that (1) the winner of the "action," i.e., entire lawsuit, is not necessarily the winner of the action on the contract; and (2) for purposes of attorney fees, there can only be one winner on each contract action. Thus, in Frog Creek, the party that ultimately lost the contract action could not be awarded fees for its initial defeat of a petition to compel arbitration filed in the same preexisting lawsuit.
So how do the above cases fit within what Frog Creek described as Section 1717's "one prevailing party on a single contract" rule? In Kandy Kiss, fees were awarded to the defendant after dismissal for lack of subject matter jurisdiction. The plaintiff appealed, arguing that the merits of the dispute would proceed in federal court, and so there was no contract action winner yet. But in affirming the fee award, the Kandy Kiss court concluded that "[defendant] should not be deprived of compensation for the fees it expended in defeating a separate action brought in an independent and separate forum."
Similarly, the court in PNEC Corp. rejected arguments that unresolved merits preclude fee awards. There, the defendant was awarded fees after obtaining a dismissal on forum non conveniens grounds. The plaintiff argued that such an early, procedural result is insufficient to merit fees. But the Court of Appeal rejected that argument, holding that final resolution of a contract action in whatever form - procedural or on the merits - can trigger prevailing party fee awards. "If an action on a contract is dismissed ... a court may award attorney fees to the moving party."
In Otay River Constructors fees were denied after the defendant defeated a petition to compel arbitration filed prior to any lawsuit. The trial court's denial was based on its conclusion that "the parties contemplated additional litigation." The Court of Appeal reversed, describing the petition to compel arbitration as an "action on the contract" noting that the defendant obtained a "simple, unqualified win" on the only issue - whether to compel arbitration. The defendant was the "prevailing party as a matter of law because it defeated the only contract claim ... in this discrete special proceeding." (Emphasis added.)
Kandy Kiss, PNEC Corp., and Otay River Constructors involved dismissals based on (1) lack of subject matter jurisdiction, (2) forum non conveniens, and (3) denial of a petition to compel arbitration. In each, the merits of the contractual dispute lived on - but in another forum. In each case, the action in the current forum was over. The appellate courts used varying phrases to define the finality of the action before them: "defeating a separate action" (Kandy Kiss); "final resolution" of a contract claim (PNEC Corp.); and "defeat[ing] the only contract claim before the trial court in this discrete special proceeding" (Otay River Constructors).
Enter Drummond II. There, the defendants obtained dismissal of their former lawyer's petition for attorney fees filed in a probate action - on grounds that the petition violated the compulsory cross-complaint rule in the defendants' pending civil action. The defendants then sought a fee award in the probate court for defeating the fee petition. The probate court awarded fees, but in Drummond I the Court of Appeal reversed, observing that the lawyer's fee claim was not dead yet - it could still be pursued in a different forum, as damages in the pending civil action. On remand, the defendants nevertheless sought fees, but were denied an award. Drummond II followed.
In Drummond II, the Court of Appeal affirmed the subsequent denial of fees, concluding that despite obtaining a dismissal of their former attorney's fee petition, the defendants were not prevailing parties because "[t]he prevailing party determination is to be made only upon final resolution of the contract claims." Drummond II, quoting Hsu v. Abbara. Drummond II stated that Hsu's "final resolution" is not necessarily satisfied even if the outcome is "final for the purposes of a particular lawsuit" - if there has been no "strategic victory at the end of the day" - only a "tactical victory in a preliminary engagement." Because the "litigation on the contract" continued "in another department," Drummond II concluded that "appellants no more 'prevailed' than does a fleeing army that outruns a pursuing one. Living to fight another day may be a kind of success, and surely is better than defeat. But as long as the war goes on, neither side can be said to have prevailed."
Was Drummond II correctly decided? The "action on the contract" was the claim for fees arising out of the attorney-client fee agreement. The probate action was final, and the defendants had defeated their former lawyer's fee petition in that forum. To combine the words of Kandy Kiss, PNEC Corp., and Otay River Constructors, the defendants in Drummond II had "defeat[ed] a separate [probate] action" by obtaining "final resolution of [the only] contract claim," thereby winning that "discrete special proceeding." To borrow the Frog Creek court's description of Section 1717, "one prevailing party on a contract in a given lawsuit" had been determined in the probate court action.
So for purposes of Section 1717 prevailing party fee awards, which is it, battle or war? For the victor, is the win decisive in that forum? If yes, the case law tends to support a prevailing party fee award even if the merits are never reached and will be contested elsewhere. If no, then any fee award will probably have to wait until all the guns have been fired and the smoke finally clears.
Gary A. Watt is a partner with Archer Norris PLC and a member of the firm's appellate practice section. He is director and supervising attorney for the U.C. Hastings 9th Circuit pro bono clinical program and chair of the Contra Costa County Bar Association's appellate practice section. He can be reached at firstname.lastname@example.org and his blog posts found at www.caappellatelaw.com.