Should Your Contracts Have Attorneys’ Fees Recovery Provisions?
Unless specifically provided by statute or by the parties’ agreement, attorney fees incurred in contract litigation are not usually recoverable. (Code Civ. Proc., § 1021; Trope v. Katz (1995) 11 Cal.4th 274, 278; Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124.)
If authorized by contract, however, reasonable attorney fees may be recovered by the prevailing party in contract litigation as part of an award of “costs” through the interaction of Code Civ. Proc. §1032(b) (allowing prevailing party to recover costs), Code Civ. Proc., § 1033.5(a)(10) (allowable costs include attorney fees if authorized by contract or law), and Civ. Code §1717 (allowing recovery of attorney fees and costs in contract enforcement actions if the contract provides for recovery). See generally PLCM Group, Inc. v. Drexler (2000) 22 Cal.4th 1084; Profit Concepts Mgmt., Inc. v. Griffith (2008) 162 Cal.App.4th 950, 953.
Who is the prevailing party?
A court may determine which party (if any) prevailed on the contract and the amount of any attorney fees award, subject to certain statutory rules. (Civ. Code §1717(a), (b)(1).)
The prevailing party is the one who recovers the greater relief in the contract action, unless the court finds that there is no prevailing party. (Civ. Code §1717(b)(1).) The contract itself may include a definition of the term “prevailing party” that expands on the statutory definition.
Tort as well as contract claims may be covered
An attorney fee clause can provide that both tort as well as contract claims are covered. See Santisas v. Goodin (1998) 17 Cal.4th 599, 617 (fee clause covering both contract and tort); Casella v. Southwest Dealers Servs., Inc. (2007) 157 Cal.App.4th 1127, 1161 (fee clause might cover both contract and tort claims).
If the parties’ contract provides that only one of them will be entitled to attorney fees in an action for breach of the contract, the other party will nevertheless be entitled to recover its reasonable attorney fees if it prevails. In other words, the law requires that the contractual right to attorney fees be reciprocal. (Civ. Code §1717(a).) See, e.g., Exarhos v. Exarhos (2008) 159 Cal.App.4th 898, 903. This right may not be waived. (Civ. Code §1717(a); Beverly Hills Prop. v. Marcolino (1990) 221 Cal.App.3d Supp 7.)
Should the contract provide for attorney fee recovery at all?
Because of the reciprocity effect of §1717, the parties should consider whether, in some circumstances, it might be preferable not to include an attorney fee provision in the contract at all or, alternatively, to limit attorney fees to a specified percentage of the value of the contract.
Attorney fee clauses can become the motivating factor in continuing litigation of certain types of claims, particularly in class action lawsuits. If you rather than the other party to the contract, has a greater risk of adverse litigation, an attorney fee clause could attract nuisance lawsuits.
In deciding whether to include a contract provision for payment of attorney fees, you should consider the following:
- Is it likely that an attorney fee provision will favor one side?
- In a dispute, will the attorney fee provision stimulate litigation if, without this provision, the parties would be more likely to compromise?
- Is one party financially stronger than the other? If so, the deep-pocket party who can afford to litigate will have an advantage unless the other party has a chance to recover its attorney fees?
- Are disputes likely to be over small amounts of money? If so, an attorney fee provision may result in litigation over fees that are greater than the amount in dispute.
- Do the parties want to provide for attorney fees in some types of disputes, but not in others? This type of division is enforceable if both parties are represented by counsel and the contract recites that fact.
- Which party is more likely to breach the contract? That party would probably not want an attorney fee provision.
- Is the provision likely to render an arbitration agreement unconscionable? See, e.g., Subcontracting Concepts (CT), LLC v. De Melo (2019) 34 Cal.App.5th 201.
You should consider the following when designing an attorney fees provision:
- The provision could allow a party to make a settlement offer that, if rejected and not bettered at trial, shifts the risk of attorney fees.
- The provision should specify whether contract, tort, or all actions give rise to payment of attorney fees.
- The provision should cover both future litigation of the claim as well as any costs of enforcing the judgment.
- The provision can also limit the availability of attorney fees depending on the procedure. See Kalai v. Gray (2003) 109 Cal.App.4th 768, 777. Conditioning attorney fees on participation in mediation before litigation or arbitration is commenced allows the parties to enforce the mediation clause. See optional provision below.
Sample attorney fee provision
Attorney Fees. In any litigation, arbitration, or other proceeding by which one party either seeks to enforce its rights under this Agreement (whether in contract, tort, or both) or seeks a declaration of any rights or obligations under this Agreement, the prevailing party shall be awarded reasonable attorney fees, together with any costs and expenses, to resolve the dispute and to enforce the final judgment.
Regardless of the above standard form, in the documents I prepare for clients that will contain an attorneys’ fees provision, I use a more comprehensive description.
Suggested other provisions to consider including, are the following:
Definition of Prevailing Party Conditional on Offer. If either party commences arbitration or litigation arising from the interpretation or performance of this Agreement, then at least _ _[e.g., 30 calendar days]_ _ before commencement of the arbitration or trial, each party shall submit to the other a confidential settlement offer (“Offer”). No Offer is admissible in evidence in any arbitration or at trial with respect to the liability of a party; each party shall keep each Offer confidential until the tribunal or court makes a final award. If the parties do not reach a settlement, the tribunal or court in the arbitration or litigation shall award to the prevailing party reasonable costs and expenses incurred in the arbitration or litigation, including expert witness fees and attorney fees.
If the final award by the tribunal or court is less than the defendant’s Offer, then the defendant is the prevailing party. If the final award by the tribunal or court is more than the plaintiff’s Offer, then the plaintiff is the prevailing party. If the final award by the tribunal or court is between the two Offers, neither party is a prevailing party and each party shall pay for its own costs and expenses. A party that has not made an Offer cannot be a prevailing party; that party’s Offer shall be deemed to be zero if it is the defendant, or the claimed amount if it is the plaintiff.
Forfeiture of Attorney Fees for Failure to Mediate. If either party commences an action without first participating in mediation, or refuses a request to mediate, that party is not entitled to any award of attorney fees, even if that party would otherwise be entitled to such an award.
About the Author
D. Steven Yahnian has been a member of the California Bar and a practicing Attorney since 1980. He has also been a California CPA since 1984. Mr. Yahnian also holds the CFP® designation.
Mr. Yahnian practices in the following areas of law through YAHNIAN LAW CORPORATION:
- Estate Planning & Administration
- Asset Protection Planning
- Tax Planning, Tax Debt Resolution and Tax Litigation
- Business & Corporate Law and Planning
- Real Property Law & Planning
As a CPA/CFP, Mr. Yahnian also has a separate accounting and tax return preparation practice called DSA ACCOUNTING.
Mr. Yahnian is a California State Bar Certified Specialist in the following
• Taxation Law and
• Estate Planning, Trust & Probate Law.
Mr. Yahnian received a B.S. degree in Accounting from USC, a J.D. from Loyola University of Los Angeles School of Law and an LL.M. in Taxation from New York University Law School. He also has a Certificate in Taxation from UCLA (with distinction). Mr. Yahnian also has an MS in Taxation* from UCLA (with Distinction).