Attorney Fee Clause In Contract

By:  Erik Watkins, Esq.

 

When entering into a contract the terms that are in that contract should be determined by the potential breaches.  Aside from a well developed scope and definition of performance from all parties to the contract, an attorney fee clause is nothing to be overlooked.

 

            In California, parties are entitled to attorney’s fees only by statute or contract.  Specifically, California Code of Civil Procedure (CCP) §1021 states, “Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties…”

 

Equal Application of Clause

The American Rule of litigation is that generally parties bear their own attorney’s fees.  The theory is that it encourages parties to seek judicial determination of grievances.  If the losing party always had to pay attorney’s fees for ALL involved, the risk would be too big to go to court.  As a result, California law has determined that each party shall bear their own attorneys fees for litigation unless that right is granted in statute or agreed to by contract.

 

Parties have broad rights to contract, including allocating attorney’s fees to the prevailing party should a disagreement arise out of the contract.  Many parties in superior bargaining positions try to include one-sided attorney’s fee clauses in contracts, limiting their own downside and handcuffing the other contracting party under what would be considered an unfair attorney fee clause.  Attorney fee clauses are subject to California Civil Code limitations, specifically, Civil Code §1717 et seq.  That statute states that unless both parties were represented by counsel, one-sided attorney’s fees are applied to the entire contract and applied equally to both parties.  In short, one-sided attorney’s fees clauses are only binding if both sides were represented by counsel and the contract specifically states that – otherwise they are applied equally to the prevailing party.

 

Application of Clause to Cause of Actions Related to a Contract

If a contract contains a provision for an award of attorneys’ fees to the prevailing party that is broad enough to apply to “all claims” or “any litigation” associated with the contract, the court may apply the provision to alternative pled causes of actions including tort actions.  Be cautious when counter-suing a plaintiff who is suing for breach of contract. Additionally, be cautious when, as plaintiff, you are suing breach of contract and in the alternative other tort type causes of action.

 

The court in Kahn v. Shim (2016) 7 Cal.App.5th49 had to determine the propriety of an award of attorney fees in a dispute between parties to a contract.  Kahn filed suit for both breach of contract and tort causes of action.  Shim counter-sued Kahn for breach of contract, and other torts including fraudulent concealment.  Ten days prior to the bench trial, Kahn dismissed its entire suit without prejudice. The case continued to trial solely on the Shim’s counter claims.  The court found for Kahn on all causes of action of the counter claim.  Shim then files a motion for fees on the complaint. The trial court awarded Shim fees for his defense against the complaint as a whole, citing CCP §1032(a)(4), “Prevailing party includes … a defendant where neither plaintiff nor defendant obtains any relief.”  Kahn appealed the award.  The appeals court agreed that Civil Code §1717(b)(2) barred recovery of attorney fees spent by Shim in defending the contract claim

 

The court, following the holding of the Supreme Court in Santisas v. Goodin (1998) 17 Cal.4th599, 617, that whether a party which has voluntarily dismissed its tort claims before trial will be liable for its opponent’s attorney fees spent in defending those tort claims is determined by the contract, and the fee provision, “depending upon its wording, may afford the defendant a contractual right, not affected by section 1717, to recover attorney fees incurred in litigating the [noncontractual] causes of action.”

 

The court in Santisas made clear that CCP §1032 works in tandem with Civil Code §1717, by providing for fees for other noncontract claims if the agreement is broadly phrased enough to cover those claims.  The court found that “because the finding that Shim was the prevailing party on Kahn’s dismissed complaint as a whole cannot be affirmed in light of section 1717(b)(2), the judgment is reversed on this point.” [Kahn, supra, 7 Cal.App.5th 49, 59].

 

The court next decided whether the attorney fee provision in the contract between Kahn and Shim was broad enough to include tort causes of action that would be within the scope of the attorney fee clause.

 

The agreement between Kahn and Shim provided the prevailing party to be awarded fees if “any litigation … is commenced between the parties … to this Contract of Sale … concerning its terms interpretation or enforcement or the rights and duties of any part in relation thereto…” [Kahn v. Shim (2016) 7 Cal.App.5th49, 53].  

 

The tort causes of action alleged by Kahn were based on essentially the same claims as the breach of contract cause of action.  The court found that “because they [tort causes] were directly tied to the allegations that certain of the terms (Shim’s warranties) were false, these tort claims easily fall within the reach of the fee provision covering “any litigation concerning [the contract’s] terms.”  [Kahn v. Shim, supra, 7 Cal.App.5th  49, at 62].

 

The court remanded to the trial court with instructions to follow the standards set in Santisas and also to address the issue of allocating the fees between the causes of action (parse out fees related solely to the tort claims).

 

Considerations for Attorney’s Fee Clause

If it is more likely than not the other party will be the breaching party, one would want a full-attorney fee and costs clause to the prevailing party – in the contract.  For instance, a lender in a loan transaction would want an attorney’s fee clause in the loan documents because the obligations of the lender are very little, other than providing the funding of the loan. A borrower on the other hand would not want the attorney’s fee clause in the contracts because the borrower is most likely going to be the party breaching the contract by not making timely payment or failing to fulfill any of the other obligations set forth in the loan contracts.

 

As detailed above, the exact wording of the attorney fee clause matters in the interpretation as to scope of the provision.  If the provision is worded broadly, it may be applied to all litigation related to the contract, including non-breach of contract causes of action.

 

 

Nothing in this article should be relied upon as legal advice, construed as providing legal advice or creating an attorney-client relationship.  

 

Zahbihi & Watkins Law Firm, APC is the premier boutique business law firm in the Sacramento Valley region of California and specializes in commercial secured transactions and litigation.  Please contact Zahbihi & Watkins Law Firm, APC if you would like to discuss your specific situation.