Defendants who are sued for breach of contract often take comfort in the fact that the contract contains a provision that will award them attorney fees if they prevail in the action. The more frivolous the action, the more confident a defendant may feel, as an attorney fees award will seemingly accompany a final judgment. But if a plaintiff voluntarily dismisses his case before trial, a defendant may "feel" like a prevailing party, but has absolutely no right to recover any fees. It may be only after attorney fees have piled up that a plaintiff is persuaded of the futility of the case and the necessity of dismissal, yet that is exactly when attorney fees are not recoverable. In this way, a defendant is often at the mercy of a plaintiff's last-minute decision to dismiss a case, and has little assurance of being able to recoup attorney fees for defending against even the most frivolous cases. In fact, the more frivolous the case, the more likely a voluntary dismissal before trial, and the more frustrating an inability to recover fees will seem.
Under California law, a defendant may not recover attorney fees pursuant to a contract claim where a plaintiff voluntarily dismisses the complaint, regardless of the proximity to trial and the amount of work that defendant's counsel has completed. Whether a case is dismissed with or without prejudice, Civil Code Section 1717 precludes an award of attorney fees in a breach-of-contract action where the plaintiff voluntarily dismisses the action and the request for attorney fees is based on contract claims. Santisas v. Goodin (1998) 17 Cal.4th 599, 608. This is because Section 1717 states that there is no prevailing party for contract claims where a matter has been voluntarily dismissed. It is not even possible to avoid this rule by creatively drafting the attorney fees provision to define "prevailing party" differently than provided in the statute. Mitchell Land and Imp. Co. v. Ristorante Ferrantelli, Inc. (2007) 158 Cal.App.4th 479, 486.
Nonetheless, defendants are not entirely helpless in this situation. It is rare that a breach-of-contract case is filed without a few, if not several, of the typical accompanying tort claims, such as fraud. In Santisas, the state Supreme Court held that, although Section 1717 precludes the recovery of attorney fees under a contract claim pursuant to the attorney fees provision, it will not preclude an award of attorney fees in connection with a complaint that contains both tort causes of action and contract causes of action.
In other words, defendants can recover attorney fees pursuant to an attorney fees contract provision if a plaintiff has dismissed a complaint containing both contract claims and tort claims, where the contract contained a broad attorney fees provision. If the attorney fees provision in an agreement states, "the prevailing party in any action arising from this agreement shall be entitled to recover all reasonable fees and costs incurred in the course of said proceeding," the defendant can recover attorney fees incurred in connection with litigating the tort claims that arose out of the same contract, notwithstanding a plaintiff's voluntary dismissal.
This law has wide implications that affect both how contract claims are litigated and how attorneys draft such provisions. For starters, attorneys defending a complaint with contract claims need to be careful when advising clients on the likelihood of recovering attorney fees at the conclusion of the action. In the event that the plaintiff has added tort causes of action, the attorney fees provision needs to be carefully examined to determine whether the provision is broad enough to encompass tort claims. Close attention should be paid to determine whether plaintiff has sought attorney fees in its prayer for relief or within the tort cause of action itself. California courts have held that a plaintiff who seeks attorney fees in the prayer for relief and attaches a copy of an agreement that contains an attorney fees provision to its complaint, is judicially estopped from contending that the provision does not authorize an award of attorney fees. International Billing Services v. Emigh (2000) 84 Cal.App.4th 1175.
In fact, the more frivolous the case, the more likely a voluntary dismissal before trial, and the more frustrating an inability to recover fees will seem.
On the other hand, if an attorney represents a plaintiff in attempting to recover money due under a contract, he should think twice before simply throwing in a fraud cause of action or other tort claims that are long shots. Adding such claims can open clients up to liability where a defendant can successfully defeat those claims, even if the defendant obtains victory prior to trial through a demurrer or motion for summary adjudication. Further, if a plaintiff leaves tort causes of action out, the plaintiff essentially holds all of the cards - he can walk away from the breach of contract claim without any fear of an adverse attorney fees award notwithstanding the contract language itself.
Finally, this law should be considered when drafting attorney fees provisions. Depending on the nature of the parties' arrangement, an attorney may choose to draft a narrow attorney fees provision to provide his client with the security of being able to file a complaint including tort claims, reserving the option to dismiss those claims at any time without the fear of an attorney fees award. Alternatively, the attorney may suggest that the client consider a broad attorney fees provision so that he can recover fees if tort claims are brought and the claim is eventually voluntarily dismissed. Whatever the situation, attorneys should always take a fresh look at Section 1717 when dealing with contracts that contain attorney fees provisions.