Defendant Prevails On Non-Existent Contract

by Allen Matkins

Sometimes, the law simply gets “curiouser and curiouser”. Last week, I happened across a decision by the Fourth District Court of Appeal that reached the remarkable conclusion that a defendant was the prevailing party on a contract that it had proved didn’t exist. Douglas E. Barnhart, Inc. v. CMC Fabricators, Inc., 2012 Cal. App. LEXIS 1202 (Nov. 20, 2012).

The plaintiff in the case was a general contractor who had solicited bids from subcontractors. The defendant submitted a bid and the plaintiff used it in preparing its own bid for a project. Although the parties sent each other proposed subcontracts, neither signed. The plaintiff found another supplier and sued the defendant for $66,110. The plaintiff had two theories: breach of contract and promissory estoppel. After a bench trial, the court found that the parties had never entered into a contract but awarded the plaintiff $21,111 on its promissory estoppel claim. The defendant then moved unsuccessfully for an award of $150,484.77 in attorneys’ fees based on an attorneys’ fee provision in its bid. The trial court, however, ruled that the plaintiff was the prevailing party on the contract that the court found did not exist!

The Court of Appeal reversed on the basis of Civil Code Section 1717 which provides that when a contract provides for an award of fees to enforce a contract, the party prevailing “on the contract” is entitled to reasonable attorney’s fees. According to the Court, the primary purpose of this statute is to provide mutuality of remedy and thus a party who establishes that a contract is invalid, inapplicable, unenforceable, or nonexistent can recover whenever the opposing party would have been entitled to recover attorney fees had it prevailed on the contract.

But did the defendant really prevail “on the contract”? Leaving aside the question of attorneys’ fees, the defendant was the loser because it was found liable to the plaintiff on the promissory estoppel claim. Associate Justice Joan K. Irion, writing for the Court, found that the dispositive issue is whether a claim based on promissory estoppel is a claim “on the contract”. After surveying the case law, she concluded that an action is “on the contract” if it involves an agreement “in the sense that the action (or cause of action) arises out of, is based upon, or relates to an agreement by seeking to define or interpret its terms or to determine or enforce a party’s rights or duties under the agreement . . .”. (My former students will, I hope, at this point recall that an agreement isn’t the same thing as a contract.) Ultimately Justice Irion concludes that a claim for promissory estoppel does not “involve” a contract and there, is not a claim “on a contract” within the meaning of Section 1717.

One lesson from this case is that less may sometimes indeed be more. Plaintiffs’ attorneys are wont to plead as many claims as are possibly viable. One reason is that it may be difficult at the outset to know which claims will “have legs”. Also, one can always be second-guessed for leaving a claim out. This case, however, demonstrates that adding claims can be risky as well.

A piece of the main is lost

It was with great sadness that I learned of the recent untimely death of Aram Peter Kezirian, Jr. I got to know Peter when he joined the Department of Corporations as its first general counsel. He was intelligent, enthusiastic and caring. His positive and energetic spirit were contagious. He is missed by many. ”[W]hen one man dies, one chapter is not torn out of the book, but translated into a better language; and every chapter must be so translated.” John Donne, Meditation XVII.

You can read more about Peter’s remarkable life here.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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