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Recovering Attorney’s Fees Pursuant to a “Prevailing Party” Contractual Provision

Under Tennessee law, which follows the “American Rule,” a winning party cannot recover its attorney’s fees from the losing party.  There are a couple of exceptions to that Rule.  One of those exceptions is that a party can recover its attorney’s fees if there is a contractual provision whereby the parties agreed to the same.

Many contracts do contain what are referred to as “fee shifting” clauses or “attorney’s fees” clauses.  Frequently, in breach of contract cases, there is a contractual provision involved which provides that the prevailing party is entitled to recover its attorney’s fees and expenses from the other party.

What if a party does not have an outright win, but only wins on some issues?  Whether the case involves a breach of contract or real estate dispute, both sides are most likely to allege numerous claims and defenses and to put many issues before the court for resolution.

A recent case involving restrictive covenants in a subdivision plat dealt with the question of whether parties who prevailed on some of their claims, but not all of them, were prevailing parties.  In addition to the many other provisions in the restrictive covenants in the plat, there was a provision which stated: “In the event litigation is implemented for the enforcement of these covenants, the prevailing party shall be entitled to an award of attorney fees as additional damages.”

Even though the case was not a breach of contract case, its reasoning applies, not only to real estate cases, but also, to breach of contract and other business litigation cases.  This is so because, under Tennessee law, restrictive covenant provisions are treated just like contractual provisions.  So, in the case, the Court of Appeals interpreted the provisions just as it would have interpreted contract provisions in a breach of contract case.

Here is what happened in the case in a nutshell.  Two homeowners in a neighborhood, who were bound by restrictive covenants, had discussions with a developer who was developing land adjoining their subdivision.  The homeowners agreed to grant an easement across their lot to the developer.

The developer filed an action in the Chancery Court of Rutherford County against the County Commission for denying its request to approve a permit for its planned development.  The homeowners association of the adjoining property moved to intervene in the case.  It was allowed to intervene and filed a counterclaim against the developer.  It also sued the homeowners who had granted the easement on the basis that they had violated the restrictive covenants by granting the easement.

The homeowners countersued the homeowners association and alleged that it did not have standing to bring suit; that it was liable to them for intentional and negligent misrepresentation; and that it should have to pay their attorney’s fees.

The Chancery Court ruled that the homeowners were not liable for granting the easement. It ruled that the homeowners association did have standing and was not liable for misrepresentation.  So, the homeowners association prevailed on some of the issues, but lost on its claim against the homeowners.

The Chancery Court ruled that the homeowners were not entitled to an award of their attorney’s fees because they did not prevail on all issues and because they did not pay their own attorney’s fees (which were paid by the developer).

The Court of Appeals of Tennessee reversed the trial court.  It held that the homeowners did not have to prevail on every claim at issue to be considered the “prevailing party.”

The Court of Appeals pointed out that the issues on which the homeowners association did prevail were merely “subissues” to the main question of whether the homeowners had violated the restrictive covenants.

The Court of Appeals also held that it made no difference that the homeowners had not paid the attorney’s fees incurred for their representation.