Attorneys’ Fees and Fee Awards Under California Law, Part I

    The original purpose of this blog was to provide commentary on California law for out-of-state companies and others who only occasionally have to deal with litigation here in the Golden State.  And one area where I get many questions in my practice has to do with attorneys’ fees and California’s fee-shifting statutes.

    I’ve been trying to get around to writing a white paper on the subject, and haven’t been able to do it (that pesky law practice of mine keeps getting in the way).  So instead, I’m going to try to put together a series of posts, probably three of them, discussing the fundamental rules having to do with fee shifting.  In today’s post, I’ll be talking about the basic rule, where the parties pay their own fees, and Civil Code section 1717, California’s contractual fees reciprocity statute.  The second post will be about the public attorney general statute, fees in civil rights and employment litigation, lodestars and multipliers.  The final post (probably) will discuss fees in consumer litigation.

    So first, the basic rule: Under California’s Code of Civil Procedure section 1021, if there is no statute or contract to the contrary, the parties to a suit pay their own fees (although the prevailing party is entitled to certain costs, which are usually pretty minimal).

    That was the easy part.  We start with the hard part after the jump.

Civil Code section 1717 and Reciprocal Contractual Attorneys’ Fees

    Here’s a hypothetical scenario involving a consumer contract: The consumer signs a form contract for a years’ worth of cell phone service.  The contract provides, in plain, comprehensible English  “If customer fails to pay any amount owed under this contract, Cell phone company will be entitled to recover from customer all costs of collection, including attorneys’ fees necessary to enforce such payment.” 

    So the customer pays her bills, but after three months, her phone stops working, and the cell phone company refuses to honor the warranty.  So her attorney sues (of course), and she wins a judgment for, say, $500 to replace the phone.  And then her attorney drops the bomb at the end of the case, filing a memorandum of costs and disbursements seeking $22,000 in attorneys’ fees.  And the court grants the fees.

    Why?  Because Civil Code section 1717(a) provides, in part,  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.

    But wait – the cell phone contract just applied to collections actions, and this isn’t a collection action.  Doesn’t matter.  Except where counsel on both sides negotiated the contract (which doesn’t happen often in cell phone sales), then as long as there is ANY breach that results in attorneys’ fees for one party enforcing the contract, then the provision applies for both sides in the event of ANY OTHER breach.  That’s the part of section 1717(a) the legislature added in 1983:

           Where a contract provides for attorney's fees, as set forth above,
        that provision shall be construed as applying to the entire
        contract,  unless each party was represented by counsel in the
        negotiation and execution of the contract, and the fact of that
        representation is specified in the contract.

    Now, let’s change our facts a little.  The phone breaks, our consumer stops paying, and the cell phone company sues her to collect.  Her defense is that she was defrauded into signing the contract and the contract should therefore be unenforceable, because the company included a phone that was a piece of junk and didn’t work, and they had no intention of honoring its warranty.  Let’s suppose the cell phone company is having a really bad day, and it loses its collection action on that ground – there is no contract because of the fraud.  Again, her attorney drops the bomb: a cost memorandum seeking attorneys’ fees, this time for $32,000, and she wins that one too.  Why?  Because when a party prevails on the ground that the contract is inapposite, invalid, unenforceable or nonexistent, the reciprocal attorneys’ fee provision STILL applies, as long as the other side would have recovered fees if it proved the contract was valid.  That’s Hsu v. Abbara (1995) 9 Cal.4th 863, 870. 

    Incidentally, under the statute, the “prevailing” party is the one who recovers “a greater relief in the action on the contract,” and the court gets to decide who that is (or it can decide that nobody prevailed). 

    If section 1717 applies, the prevailing party can recover in a rescission action (Star Pac. Inv. v. Oro Hills Ranch (1981) 121 Cal.App.3d 447, 460), to reformation actions (Wong v. Davidian (1988) 206 Cal.App.3d 264, 271)  and declaratory relief actions arising out of contract.  (Texas Commerce Bank v. Garamendi (1994) 28 Cal.App.4th 1234) .

    But the action has to be one to enforce the contract (or opposition to somebody trying to enforce the contract).  The reciprocity statute doesn’t apply to a tort action, and if the prevailing party pleads a tort and a contract, but it can’t be determined which was the basis for his win, he doesn’t get his fees.  (McKenzie v. Kaiser-Aetna (1976) 55 Cal.App.3d 84).   Furthermore, if a defendant successfully asserts a contract provision as a defense to a tort action, that is not an “action to enforce a contract.”  Gil v. Mansano (2004) 121 Cal.App.4th 739.   While the parties may by contract agree to allocate attorneys’ fees even in cases that are not for enforcement of the contract (Code of Civil Procedure section 1021), the reciprocity provision of Civil Code section 1717 won’t apply unless the action is one “to enforce the contract.”  Moallem v. Coldwell Banker Commercial Group (1994) 25 Cal.App.4th 1827.