[Update: I offer my analysis of this issue in this 2011 post.]
Chadwick Busk of The Fine Print blog told me about this item on Lexology (free registration required) by Patrick T. Sharkey of Jackson Walker LLP. I hope Patrick doesn’t mind if I quote extensively from it:
A recent Texas Supreme Court decision highlights the importance of thoughtful drafting. In Intercontinental Group Partnership v. KP Home Lonestar L.P., 295 SW3rd 650 (Tex. 2009), the Texas Supreme Court addressed the simple question: What does “prevailing party” mean?
In the Intercontinental case, the contract contained the following attorney’s fees provision: “If either party named herein brings an action to enforce the terms of this Contract or to declare rights hereunder, the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorney’s fees to be paid by losing party as fixed by the Court.”
The term “prevailing party” was not defined in the contract.
KB Home sued Intercontinental for breach of contract and lost profits. The jury found that Intercontinental breached the contract, but the jury awarded zero dollars in damages. However, the jury did award KB Home $66,000.00 in attorney’s fees. In view of this trial result, both parties claimed to be the “prevailing party.”
The singular issue addressed by the Texas Supreme Court was summarized succinctly by the Court as follows: “When a contract mandates attorney’s fees to a “prevailing party,” the term undefined in the contract, has a party “prevailed” if the jury finds the other side violated the contract but awards no monetary damages?”
After an illuminating discourse on litigants’ entitlement to attorney’s fees and the ordinary meaning of the term “prevailing party,” the Texas Supreme Court ruled that, absent a contractual definition of “prevailing party,” a party must receive affirmative judicial relief to be considered a prevailing party. Inasmuch as KB Home recovered no monetary damages, the Court concluded that KB Home did not qualify as a “prevailing party.” Consequently, the award of $66,000.00 attorney’s fees to KB Home was reversed, and the Court rendered a judgment that KB Home take nothing.
Patrick closed by recommending that “prevailing party” be defined whenever it’s used in a contract. But as Chadwick suggested to me, it must be rare for a party to have the benefit of a favorable verdict but not be awarded even nominal damages. Given that the odds of such an outcome would seem remote, I’m not sure that guarding against it is worth another defined term, or even being more specific as to meaning. Any thoughts?
Another thought—what if a court’s holding is a mixed one?
10 thoughts on “What Does “Prevailing Party” Mean?”
Not sure you need to make it another separate defined term, since it is probably used only in that one instance. Couldn’t one use something like: “…where the determinative issue in such action arises from a breach of certain terms of this agreement, the party judged to have breached such terms shall pay the reasonable attorney’s fees of the non-breaching party?” Probably needs work, but you get the idea.
D: Point taken, so I revised the post by adding “or even being more specific as to meaning” at the end of the penultimate sentence.
Referring to “breach” would be problematic, given that breach of an obligation is only one possible basis for a claim.
I would submit that in a case like this, had the jury been aware of this definition of “prevailing party” they would have awarded $1 in damages, thereby triggering the definition of “prevailing party.” Sounds like that is something to make clear to the jury, rather than defining the term in even more detail.
I have this in an arbitration provision dealing with a cost audit. There may be better ways to address this issue, but at least this provision takes a stab (by calling the parties’ and auditor’s attention to the issue and letting the auditor decide):
The party that is not the prevailing party will pay all costs of the Qualified Auditor. “Prevailing party” means the party, if any, that the Qualified Auditor determines is “clearly the prevailing party.” If there is no prevailing party, each party will pay one-half of the cost of the Qualified Auditor.
If I’m not mistaken there is quite a bit of case law on the definition of a “prevailing party” in the intellectual property context. The copyright, trademark, and patent statutes all allow for the award of attorney fees in certain cases to the “prevailing party.”
If the term isn’t defined, I could see courts looking to this case law (and I’m sure other statutes have similar terminology). It’s also probably a good place to start in coming up with ideas for your definition.
what about a case where plaintiff obtains a default on one defendant for money, but loses on another, but on equity relief, but no money
This is actually something where I think the parties usually leave it vague on purpose, because figuring out all of the possible variations is too much work for a provision that will probably never be invoked. Now, if I was writing a merger agreement, I might take the time to at least run down the likely scenarios. But most disputes in commercial deals are simply about collection of a debt owing, which means prevailing party is usually pretty apparent. (Not, not always, but usually.) So I’m not going to add four lines (in half-page column) to thousands of agreements I sign every year to deal with a situation that is actually problematic for one deal every third year. I realize that page counts are not significant to the guys doing merger deals, but if my form service agreement goes to a sixth page, a significantly higher percent of our sales deals will go to the customer’s legal department.
I’ve thought about “loser pays” clauses in patent license agreements a lot. The scenarios in which there could be “two winners” abound. The simplest example is a licensee may breach a license by not paying a royalty, but “win” when the patent is held invalid or unenforceable. In that case, who pays what, when?
I also frequently see “loser pays” provisions coupled with arbitration or mediation. This seems particularly messy since ADR frequently results in split-the-baby decisions. Who would pay under the loser pays clause if the mediator/arbitrator gives each party a bit of something? Is that then also the subject of yet more ADR? One way to address this issue, of course, is to make the language permissive rather than mandatory, but that’s not nearly as comforting in a clear breach of contract, collection, or other enforcement type claim. It also leaves open the bias towards the current “each pays their own way” argument.
Defining prevailing party is a tough road to travel since the definition may need changing with each obligation/right added or amended. In those cases, each change creates another possibility for having “mixed” results. So you’d need to consider each change with respect to its impact on your definition of “prevailing party.”
In the end, I’ve really come down with Chris: more often than not, the “prevailing party” is apparent and getting attorneys’ fees is icing anyway. Delineating the possible “mixed” scenarios for most standard form agreements is a waste of energy. When the stakes are higher, it makes sense to at least recognize the time when the loser-pays clause may “fail,” and if the times that fail are significant, then those need to be addressed.
In California, “prevailing party” has been defined in the Civil Code (1717) and the case law. I would not screw around with this one, at least for contracts governed by CA law.
Jeff: Thanks for that lead. I note that D.C. Toedt saw it too and posted this item about section 1717. Ken