In a Tennessee Breach of Contract Action Does a Voluntary Dismissal Make the Defendant the “Prevailing Party” for Contractual Attorney’s Fees?

Analysis:  In a Tennessee breach of contract case if the defendant has a counterclaim pending to recover attorney’s fees under the contract and the plaintiff voluntary dismisses the case, the defendant can recover attorney fees if not timely refiled.  This is governed by a Tennessee statute, T.C.A. § 20-6-306 that provides as follows:

(a) If a plaintiff voluntarily dismisses an action while a counterclaim is pending for contractual attorney fees, and if the plaintiff does not timely recommence the action, the court, upon proper showing, may order that the counterclaimant is the prevailing party for the purpose of recovering contractual attorney fees.

(b) This section shall only apply if the contract clause providing for attorney fees applies equally to all parties to the contract.

As a result, the counterclaiming party is essentially considered the prevailing party for the purpose of determining if contractual attorney’s fees must be paid (this is the usual terminology in contracts that discuss when attorney’s fees are due).  However, this only occurs after the plaintiff does not recommence the action in a timely manner (usually this will be within one year from the dismissal).  Even though a voluntary dismissal under Tennessee Rule of Civil Procedure 41.01 is not a determination on the merits, under this statute, it does have the impact of essentially finding the defendant is the prevailing party under a contractual term for attorney’s fees. 

This statute was adopted and put in effect on July 1, 2004.  A search on Westlaw shows this statute has not been substantively addressed by the Court of Appeals or the Tennessee Supreme Court.  I am not sure how well known this statute is but it is certainly something to consider in the context of a counterclaim in a breach of contract action.  It is not a statute that I was aware of until I came across it recently.  One other issue or note, subsection (b) of this statute makes it clear that the statute only applies if the attorney’s fees contract clause applies equally to both sides of the contract.  As a result, a one-sided attorney’s fees agreement in a contract will not allow the party to take advantage of this statute.