Contracts frequently contain a prevailing party attorney fee provision and a provision requiring that any controversy arising under the contract be decided by binding arbitration. Where both parties agree to arbitration there is no tension between these two provisions. The prevailing party and the award of reasonable attorneys fees will be determined by arbitration.
There can be tension, however, where the parties do not agree that the controversy between them is governed by the contract provision requiring arbitration. In that case a party may file a petition to enforce the arbitration agreement or the party may file a lawsuit. If a party files a lawsuit the defendant may respond with a petition to compel arbitration. If there is a pending action, a petition to compel arbitration must be filed in that action.
The tension arises from the fact that contractual attorney fee and arbitration provisions are just that – matters of contract. In the usual case both provisions are generic. The attorney fee provision simply provides, in substance, that the prevailing party is entitled to reasonable attorney fees. The arbitration provision merely provides that any controversy arising under the contract shall be decided by binding arbitration. No attempt is made to integrate these two provisions.
The contractual right to attorney fees in a pending action is governed by Civil Code section 1717 which provides: “In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.”
In Roberts v. Packard, Packard & Johnson the court was presented with the question of whether defendant, who prevailed on its petition to compel arbitration filed in a pending action, could be awarded attorney fees as the prevailing party on the petition to compel arbitration, even though the resolution of the underlying causes of action had yet to be determined by arbitration, i.e., defendant’s petition to compel arbitration was granted in a pending action.
The attorney provision in question was generic and provided: “If any action arising out of this Agreement is instituted by any Party against another Party, the prevailing Party shall be entitled to recover from the non-prevailing Party reasonable attorneys’ fees and costs.”
In a unanimous well-reasoned opinion the Second District held that because the petition to compel arbitration was granted – whether the petition is filed in an independent action or is filed in a pending lawsuit – the trial court cannot award attorney fees at that point pursuant to section 1717 because the requested relief on the contract has not been ultimately resolved. The court reasoned that there can only be one prevailing party entitled to attorneys fees on a given contract in a given lawsuit and thus an award of attorney fees under section 1717 must await resolution by an arbitrator.
The court distinguished the case from the situation where a petition to compel arbitration is filed as an independent, initiating lawsuit and the petition is denied. When the petition is filed as the initiating lawsuit, it is a distinct proceeding involving only the petition to compel arbitration. In that case, attorney fees may properly be awarded to a defendant who defeats the petition. [See, Christensen v. Dewor Developments and Frog Creek Partners, LLC v. Vance Brown, Inc., “[W]hen a party defeats an independent petition to compel arbitration, the action is terminated and the prevailing party on the petition is entitled to fees under Civil Code section 1717.” Fog Creek, supra, at 533.]
If, however, the plaintiff defeats a petition to compel arbitration in a pending action, that does not justify an award under section 1717 because the merits of the contract claims remain pending. “[D]efeating a petition to compel arbitration filed in a pending contract action does not justify a grant of fees under Civil Code section 1717 where the merits of the contract claims remain pending in that action.” (Fog Creek, supra, at 535.)
Not all attorney fee provisions are generic and result in the same treatment. In Acosta v. Kerrigan the specific fee provision read: “Should any party to this Agreement hereafter institute any legal action or administrative proceeding against the other by any method other than said arbitration, the responding party shall be entitled to recover from the initiating party all damages, costs, expenses, and attorneys’ fees incurred as a result of such action.” An award of attorney fees to the successful defendant in compelling arbitration in a pending action was not, therefore, under section 1717 but rather pursuant a specific contractual fee provision.
The opinion in Roberts disagrees with the First District opinion in Benjamin, Weill & Mazer v. Kors. That case held that defendants who prevailed on a petition to compel arbitration filed in a pending lawsuit are entitled to attorney fees even though the plaintiff’s causes of action to enforce the parties’ contract has not yet been resolved by an arbitrator.
The Roberts court determined that Kors did not adequately consider the purpose of section 1717 — to award attorney fees to the party that recovers the greater relief in the action on the contract. That determination necessarily requires resolution of the contract claims and a comparison of the extent to which each party succeeded and failed to succeed in its contentions. Kors was further criticized because the decision failed to recognize that a petition to compel arbitration filed in a pending lawsuit is not a discrete proceeding. When a petition to compel is filed in a pending action, the Arbitration Act contemplates the court’s continuing involvement in the arbitration process: the court retains jurisdiction over the case and there are several specific instances where it might be exercised. Thus, according to Roberts, any award of attorney fees pursuant to section 1717 is premature until there is a decision by the arbitrator.
Whether attorney fees will be granted pursuant to Civil Code section 1717 when a petition to compel arbitration is granted or denied will depend on: 1) The exact terms of the attorney fee provision; 2) Whether the petition is granted or denied; 3) Whether the petition is filed in an independent action, as opposed to a pending action; 4) If granted, how the court interprets the conflicting authority of Roberts and Fog Creek on the one hand, and Kors on the other.
The take-away: When a petition to compel arbitration is filed there is one bright-line rule: When a petition is denied in an independent action, attorney fees are properly awarded to the defendant in that action.
The case is less certain when a petition to compel is granted. Kors holds that defendants who prevailed on a petition to compel arbitration filed in a pending lawsuit are entitled to attorney fees. However, Kors was not followed in Fog Creek, decided by the same District, and Roberts, relying heavily on Fog Creek, holds that whenever a petition to compel arbitration is granted attorney’s fees pursuant to section 1717 must await the award of the arbitrator, except in the case where the attorney fee provision specifically authorizes fees for the prosecution or defense of a motion to compel.
Unless and until these conflicting opinions are resolved, entitlement to attorney fees when a motion to compel arbitration is granted to defendant in a pending lawsuit is uncertain, although the stronger analysis appears to be that in the Roberts and Fog Creek opinions, i.e., an award of attorney fees whenever a petition to compel is granted under Civil Code section 1717 must await an arbitration decision.
I consult with clients and accept cases involving the interpretation and affect of arbitration and fee provisions, including those involving a petition or motion to compel arbitration. For other types of cases I accept, please scroll my Home and My Practice pages. If you are seeking a legal consultation or representation, please give me a call at 818.971.9409. – Michael Daymude