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Contractual attorney fees fundamentals [MCLE]
The objective of this article and self-study test is to review entitlement to attorney fees pursuant to contracts. Readers will learn about the contractual basis for a fee award and reciprocity under Civil Code Section 1717, specific parties' entitlement to awards, the requirement of being the "prevailing party" in the litigation, and fees awarded without a decision on the merits. This article will also address a recent California Supreme Court opinion on the issue of fees awarded without a decision on the merits.
Contractual Fee Provisions and Section 1717
To recover attorney fees based on contract, a party must (1) prevail (2) in an action (3) on a contract (4) with an attorney fees provision. Hyduke's Valley Motors v. Lobel Financial Corp., 189 Cal. App. 4th 430 (2010). The Court of Appeal stated that, in determining whether an action is on a contract, the court considers the pleaded theories of recovery, the theories asserted and the evidence produced at trial, if any, and any additional evidence submitted on the motion.
Civil Code Section 1717 does not itself authorize recovery of attorney fees when provided by contract (Code of Civil Procedure Sections 1021 and 1033.5(a)(10) do that). The primary purpose of Section 1717 is to ensure mutuality of remedy by making an attorney fees provision in a contract reciprocal even if it would otherwise be unilateral by its terms or effect. See Brown Bark III, L.P. v. Haver, 219 Cal. App. 4th 809 (2013).
Brown determined Section 1717 makes an otherwise unilateral attorney fees provision reciprocal in two situations: (1) when the contract gives the right to recover attorney fees to one party but not the other and (2) when a person sued on a contract with an attorney fees provision prevails by successfully arguing the inapplicability, invalidity, unenforceability, or nonexistence of the contract.
"[T]o invoke section 1717 and its reciprocity principles a party must show (1) he or she was sued on a contract containing an attorney fee provision; (2) he or she prevailed on the contract claims; and (3) the opponent would have been entitled to recover attorney fees had the opponent prevailed." Brown. It is important to keep in mind that Section 1717 applies only to actions on a contract. Although an attorney fees provision in a contract may be drafted broadly enough to include noncontract causes of action, Section 1717 applies only to actions on a contract and does not apply to torts and noncontract claims. Brown.
A petition to compel arbitration pursuant to an arbitration clause in a contract is not an "action" under Section 1717 when the petition to compel is filed in a pending lawsuit. Roberts v. Packard, Packard & Johnson, 217 Cal. App. 4th 822 (2013). Attorney fees cannot be awarded to the prevailing party on the petition to compel arbitration until the causes of action are resolved. Ibid. The Roberts court disagreed with Benjamin, Weill & Mazer v. Kors, 195 Cal. App. 4th 40, 77 (2011), in which a different Court of Appeal concluded that defendants prevailing on a petition to compel arbitration filed in a pending lawsuit "are routinely entitled to attorney fees."
Choice-of-law provisions in contracts sometimes affect the applicability of Section 1717. In ABF Capital Corp. v. Grove Properties Co., 126 Cal. App. 4th 204 (2005), the Court of Appeal held that Section 1717 applied to a claim for contractual attorney fees, notwithstanding a choice-of-law provision requiring application of New York law. The appellate court held Section 1717 applied because it represented a fundamental public policy of the State of California. In contrast, in ABF Capital Corp. v. Berglass, 130 Cal. App. 4th 825 (2005), a different Court of Appeal held Section 1717 did not apply to a claim for contractual attorney fees because under a choice-of-law analysis, New York law applied. The Berglass appellate court distinguished the Grove Properties opinion, because in Grove Properties, "there was evidence that the contract was negotiated in both California and New York and was made in California."
In Applera Corp. v. MP Biomedicals, LLC, 173 Cal. App. 4th 769 (2009), the appellate court held an international choice-of-law provision can provide the basis for an award of contractual attorney fees. In that case, the choice-of-law provision in the contract required application of Swiss law. Under Swiss law, the prevailing party is entitled to recover attorney fees. Thus, attorney fees were recoverable in the California lawsuit under Section 1717.
Parties Entitled to Awards
In addition to any natural persons who signed the contract, a corporation represented by in house counsel can recover attorney fees under Section 1717. PLCM Group, Inc. v. Drexler, 22 Cal. 4th 1084 (2000). Parties representing themselves in propria persona are not entitled to fee awards under Section 1717. "[A]n attorney who chooses to litigate in propria persona and therefore does not pay or become liable to pay consideration in exchange for legal representation cannot recover reasonable attorney's fees under section 1717." Trope v. Katz, 11 Cal. 4th 274 (1995). But it is important to note that the Trope opinion was based on a statutory interpretation of Section 1717 and does not preclude recovery of attorney fees by pro per litigants based on other statutes. See Healdsburg Citizens for Sustainable Solutions v. City of Healdsburg, 206 Cal. App. 4th 988 (2012) (attorney who is also a party to the action can recover attorney fees under the private attorney general statute, Code of Civil Procedure Section 1021.5).
Nonsignatories to a contract may sometimes be entitled to fee awards. A nonsignatory will be bound by an attorney fees provision in a contract when the nonsignatory party stands in the shoes of a party to the contract. Apex, LLC v. Korusfood.com, 222 Cal. App. 4th 1010 (2013); Cargill, Inc. v. Souza, 201 Cal. App. 4th 962 (2011). In that situation, the nonsignatory party is liable for attorney fees if it would have been entitled to fees if it prevailed. Apex; Sessions Payroll Management, Inc. v. Noble Construction Co., 84 Cal. App. 4th 671 (2000). A nonsignatory seeking relief as a third-party beneficiary may recover attorney fees under a fee provision only if it appears the contracting parties intended to extend the right to recover attorney fees to that party. Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC, 162 Cal. App. 4th 858 (2008).
Section 1717 entitles a noncontracting party to recover contractual attorney fees when it defeats a contract based cause of action that would have made the noncontracting party liable for contractual attorney fees had it lost. In Brown, the plaintiff sued the defendant for breach of revolving line of credit contracts. The defendant was not a party to the contracts but was the successor to a contracting party. The contracts had attorney fees provisions that were made binding on the contracting parties' successors. The court held the defendant, though not a contracting party, was entitled to recover attorney fees because it defeated claims for breach of the line of credit agreements that would have exposed it to liability for attorney fees had it lost.
The general rule is that the party prevailing on the contract is the party who recovered "greater relief in the action on the contract." Section 1717(b)(1) states the court "may also determine that there is no party prevailing on the contract for purposes of this section." The provision gives the trial court discretion to determine that no party has prevailed on the contract.
When determining which side is the prevailing party under Section 1717, the trial court "is to compare the relief awarded on the contract claim or claims with the parties' demands on those same claims and their litigation objectives as disclosed by the pleadings, trial briefs, opening statements, and similar sources." Hsu v. Abbara, 9 Cal. 4th 863 (1995). In determining litigation success, courts should respect substance rather than form, and may be guided by equitable considerations connected to litigation success. Under Hsu, a party who is denied direct relief on a claim may nonetheless be found to be a prevailing party if it is clear the party has otherwise achieved its main litigation objective. The court may not consider the parties' fault or litigation motives in determining the prevailing party. Silver Creek, LLC v. BlackRock Realty Advisors, Inc., 173 Cal. App. 4th 1533 (2009).
When one party obtains a "simple, unqualified victory by defeating the only contract claim in the action," that party is entitled to recover attorney fees under Section 1717 as a matter of right, and the trial court has no discretion to deny the prevailing party attorney fees. Hsu; Brown. On the other hand, if neither party achieves such a complete victory, the trial court has discretion to determine which party prevailed on the contract or whether, on balance, neither party prevailed sufficiently to justify an award of attorney fees. Scott Co. v. Blount, Inc., 20 Cal. 4th 1103 (1999).
But in de la Cuesta v. Benham, 193 Cal. App. 4th 1287 (2011), the Court of Appeal held the trial court abused its discretion by denying a landlord's motion to recover attorney fees when the landlord recovered 70 percent of what was claimed in an action against the tenant. Under Benham, "If the results in a case are lopsided in terms of one party obtaining 'greater relief' than the other in comparative terms, it may be an abuse of discretion for the trial court not to recognize that the party obtaining the 'greater' relief was indeed the prevailing party."
Another issue arises when contract and noncontract claims are combined. In Maynard v. BTI Group, Inc., 216 Cal. App. 4th 984 (2013), the plaintiff recovered damages against the defendant for negligence, while the defendant prevailed on the plaintiff's breach of contract cause of action. The attorney fees provision in the contract was broad enough to cover all claims. The Court of Appeal held that the trial court correctly denied the defendant's motion for attorney fees because the plaintiff was the prevailing party, even though she recovered under a negligence theory. The court explained, correctly so, that Code of Civil Procedure Section 1021, not Civil Code Section 1717, was the operative statutory provision.
Apportionment of fees between contract and noncontract causes of action is discretionary with the trial court. El Escorial Owners' Assn. v. DLC Plastering, Inc., 154 Cal.App.4th 1337 (2007). No apportionment is required if the covered and noncovered claims were based on the same operative facts and issues. Erickson v. R.E.M Concepts, Inc., 126 Cal. App. 4th 1073 (2005). Also, no apportionment is required if the attorney fees provision is broad enough to encompass contract and noncontract claims. Maynard.
Contract Attorney Fees Awarded Without Decision on Merits
Section 1717(b)(2) "sets forth an exception to the general entitlement to contractual attorney fees." CDF Firefighters v. Maldonado, 200 Cal. App. 4th 158 (2011). The exception is triggered when an action is dismissed: "[w]here an action has been voluntarily dismissed ..., there shall be no prevailing party for purposes of this section." Section 1717(b)(2). But, if the action is dismissed involuntarily, for example, as the result of a party's motion to dismiss, the 1717(b)(2), bar is inapplicable.
The California Supreme Court recently addressed whether a defendant is a prevailing party under Section 1717 when the defendant obtains a dismissal based on a forum selection clause. In DisputeSuite, LLC v. Scoreinc.com, 2 Cal. 5th 968 (2017), the California Supreme Court held that a defendant in an action arising out of a contract is not entitled to an award of attorney fees under Section 1717 by virtue of having obtained a dismissal in a California court on the ground the agreement at issue had a forum selection clause specifying Florida as the jurisdiction for any dispute. A significant fact to the court's decision was the plaintiff had already refiled the lawsuit in Florida when the trial court decided the attorney fees motion. Thus, the Supreme Court reasoned: "While [the defendant] had succeeded enforcing the forum selection clause in two of its agreements with [the plaintiff], it had not defeated [the plaintiff]'s breach of contract and related claims. Because none of those claims had yet been resolved and the litigation was still ongoing in Florida, the California trial court was in no position to 'compare the relief awarded on the contract claim or claims with the parties' demands on those same claims and their litigation objectives'; that comparison could be made only 'upon final resolution of the contract claims.'"
The opinion in DisputeSuite calls into question the continuing validity of decisions upholding attorney fee awards to parties who obtained dismissals based on lack of jurisdiction, improper venue, forum non conveniens, or a forum selection clause - at least when the lawsuit had been refiled in the appropriate forum when the attorney fees were awarded. See, e.g., Profit Concepts Mgmt. Inc. v. Griffith, 162 Cal.App.4th 950 (2008) (attorney fees correctly granted to a party who successfully moved to dismiss a lawsuit for lack of personal jurisdiction); PNEC Corp. v. Meyer, 190 Cal. App. 4th 66 (2010) (when action on a contract is dismissed based on forum non conveniens, attorney fees may be awarded to the prevailing party under Civil Code section 1717 if the contract provided for such fee shifting). In DisputeSuite, the California Supreme Court noted that Profit Concepts left unclear whether the plaintiff had refiled the lawsuit in the contractually agreed upon forum before the trial court granted the defendant's attorney fees motion, and distinguished PNEC on the ground the plaintiff had not refiled the lawsuit. DisputeSuite stated it "disapprove[d] Profit Concepts ... and PNEC ... to the extent they state the prevailing party determination under section 1717 must be made without regard to the contract litigation's continuation in another forum."
The opinion in DisputeSuite likely will not affect decisions in which dismissal was not on the merits, but refiling the lawsuit would not be possible. See, e.g., Pueblo Radiology Medical Group, Inc. v. Gerlach, 163 Cal. App. 4th 826 (2008) (defendants were held to be entitled to recover attorney fees under Section 1717 when they were dismissed out of the litigation on a determination they were not alter egos of the contracting party).