May 26, 2009

Contractual Attorney's Fees · Strategies for Optimal Recovery

Many contracts contain language permitting a prevailing party to recover reasonable attorney's fees from the other party in the event of a legal dispute. Few parties, however, understand that the result of invoking such attorney's fees provisions depends not only on the language of the provisions themselves, but also on the relevant statutes and case law that come into play when a dispute leads to litigation. A careful review of such statutes and case law suggests that in many situations it may be useful to think more strategically about such provisions both when they are drafted and during the course of litigation.

Under California law, contractual attorney fee provisions are governed by several statutes, including California Civil Code Section 1717 and California Code of Civil Procedure ("CCP") Sections 1032 and 1033.5. Section 1717 provides as follows:

In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs.

Cal. Civ. Code § 1717(a). Thus, the primary thrust of this statute is to ensure contractual attorney's fees provisions are enforceable and reciprocal. Section 1717(b) further provides that:

(1) The court, upon notice and motion by a party, shall determine who is the party prevailing on the contract for purposes of this section, whether or not the suit proceeds to final judgment. Except as provided in paragraph (2), the party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract. The court may also determine that there is no party prevailing on the contract for purposes of this section.

(2) Where an action has been voluntarily dismissed or dismissed pursuant to a settlement of the case, there shall be no prevailing party for purposes of this section.

Cal. Civ. Code § 1717(b)(1)&(2). Clearly, under this provision the court has discretion to determine who the prevailing party is, with two exceptions: (1) when an action has been voluntarily dismissed; and (2) when an action has been dismissed pursuant to a settlement.

At first blush, this statute seems quite clear. However, as with many other statutory provisions, ambiguity exists, for when has an action been, in fact, voluntarily dismissed? And when can a party be said to prevail? As a general rule, courts interpret the statute liberally and literally. Thus, in Santisas v. Goodwin, 17 Cal. 4th 599 (1998) ("Santisas"), the California Supreme Court held that the voluntary dismissal of a contract claim with prejudice did not entitle defendant to attorney fees on the contract claim. A similar decision was recently reached by the court in Marina Glencoe v. Neue Sentimental Film AG, 168 Cal. App. 4th 874 (2008). In that case, plaintiff dismissed the case with prejudice quite late in the proceeding when a decision was pending on a potentially dispositive motion. Nevertheless, the court held that defendant was not entitled to attorney's fees on the contract. At the same time, courts have awarded fees to a party prevailing on a contract claim even when litigation was pending between the parties on other claims or in other venues. See, e.g., Christensen v. Dewor Development, 33 Cal. 3d 778 (1983); Pueblo Radiology Medical Group, Inc. v. Gerlach, 163 Cal. App. 4th 826 (2008); Cole v. BT & G, Inc., 141 Cal. App. 3d 995 (1983). In short, a voluntary dismissal of a contract claim at almost any time prior to judgment will cut off the availability of attorney fees as to the contract claim subject to the litigation at hand; while an award of fees may be available if judgment is had on the contract issue even if there is other pending litigation if the issue and proceeding is sufficiently distinct.

The availability of attorney's fees may also depend CCP Sections 1032 and 1033.5. Section 1032 authorizes the recovery of litigation costs by a prevailing party as a "matter of right". Section 1033.5 delineates what fees are allowable under Section 1032, and includes attorney's fees, when such fees are authorized by contract. CCP § 1033.5(a)(10). A "prevailing party" is defined as "the party with a net monetary recovery, a defendant in whose favor a dismissal is entered, a defendant where neither plaintiff nor defendant obtains any relief, and a defendant as against those plaintiffs who do not recover any relief against the defendant." CCP § 1032(a)(4). Notably, this definition of "prevailing party" includes a defendant in whose favor a dismissal—voluntary or otherwise – is entered. Such a clear contrast to Section 1717 raises the question of when do the cost statutes apply and when does Section 1717? The answer depends, in large measure, on the nature of the claims and the wording of the applicable contract provision itself.

In Santisas, the California Supreme Court addressed the interplay between the statutes and the contract language. In Santisas, plaintiffs had voluntarily dismissed a claim, based on a contract, prior to judgment. Defendants pressed for their costs. The Court looked to the language of the applicable attorney's fees provision. The Court noted that: "On its face, the provision embraces all claims, both tort and breach of contract, in plaintiffs' complaint, because all are claims 'arising out of the execution of the agreement or the sale.'" Santisas, 17 Cal. 4th at 608 (citing Lerner v. Ward, 13 Cal. App. 4th 155, 160-161 (1993) and Xuerub v. Marcus & Millichap, Inc., 3 Cal. App. 4th 1338, 1341 (1992)). Significantly, the Court continued Section 1717 would only affect plaintiffs' contract claims:

If the voluntarily dismissed action also asserts causes of action that do not sound in contract, those causes of action are not covered by section 1717, and the attorney fee provision, depending on its wording, may afford the defendant a contractual right, not affected by section 1717, to recover attorney fees incurred in litigating those causes of action. Similarly, if a plaintiff voluntarily dismisses an action asserting only tort claims (which are beyond the scope of section 1717), and the defendant, relying on the terms of a contractual attorney fee provision seeks recovery of all attorney fees incurred in defending the action, the plaintiff could not successfully invoke section 1717 as a bar to such recovery.

Santisas, 17 Cal. 4th at 617. The Court further emphasized that, while the language of the contract is relevant in ascertaining a prevailing party, it is not always dispositive. Certainly, if the contract is silent, the court will step in:

If, as here, the contract allows the prevailing party to recover attorney fees but does not define 'prevailing party' or expressly either authorize or bar recovery of attorney fees in the event an action is dismissed, a court may base its attorney fees decision on a pragmatic definition of the extent to which each party has realized its litigation objectives, whether by judgment, settlement, or otherwise.

Id. at 622. See also Silver v. Boatwright Home Inspection, Inc., 97 Cal. App. 4th 443, 452 (2002). At the same time, the court noted that, with respect to voluntary dismissals, the express language of section 1717 would override any conflicting contractual language:

When a plaintiff files a complaint containing causes of actions within the scope of section 1717... and the plaintiff thereafter voluntarily dismisses the action, section 1717 bars the defendant from recovering attorney fees incurred in defending those causes of action, even though the contract on its own terms authorizes recovery of those fees."

Santisas, 17 Cal. 4th at 617 (emphasis in original). Accordingly, the availability of attorney's fees in any given case will depend on the contractual provision involved, the nature of the claims made, the timing of a voluntary dismissal (if any), and the requirements imposed by the applicable statutes.

In short, while a voluntary dismissal of a contract-based cause of action before judgment in most cases relieves a plaintiff of the burden of covering defendant’s attorneys fees, it will not relieve the plaintiff of those fees attributable to non-contractual claims if the language of the contract's attorney fees provision is broad enough to encompass such claims and the court determines that the defendant is the prevailing party. An additional point to keep in mind is that, while the Santisas court noted that courts would need to consider how to apportion fees as between contract and non-contract claims, earlier decisions have held that, where contract and non-contract claims are so intertwined that it would be too difficult to separate them, then the combined attorney's fees are recoverable under Sections 1032 and 1033.5. See e.g., Abdallah v. United Savings Bank, 43 Cal. App. 4th 1101, 111 (1996).

Clearly, whether a party is entitled to an award of attorneys fees in any given case depends on a number of factors, including the language of the applicable attorneys fee provision itself. While difficult to predict the nature of a dispute that leads to litigation, it is nevertheless worthwhile for parties to contemplate different possibilities and draft the language accordingly. Deliberate drafting with an eye towards the relevant statutes and case law cannot remedy a dispute, but it can provide both parties with more certainty as to what claims are subject to the provision (contract and/or non-contract?) and at what point can a party be said to prevail.

For more information on attorneys fees, or other contractual issues, please contact either Lawrence Inouye or Colleen Sechrest at 310.712.0100 or send an email to: linouye@shiotani-inouye.com or csechrest@shiotani-inouye.com.