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To the victor go the ...
attorney's fees?
Part 1 - Stacking the
Deck
Some of my optimistic
clients ask me from time
to time: "When I
win, does the other side
have to pay my
attorney's fees?" Some
of my pessimistic (or
realistic) clients ask
the converse: "If
I lose, do I also have
to pay the other side's
attorney's fees in
addition to my own?"
Given the substantial
expense of attorney's
fees in litigation (I
know, I know), these are
important questions.
My lawyer-like answer:
"It depends."
Specifically, it depends
on whether there is a
statute or contract
provision which changes
the default rule that
each party to a lawsuit
pays their own
attorney's fees,
regardless of who wins.
There are statutes which
change the default rule.
For example, in
construction cases
involving a claim on a
public works payment
bond, a statute provides
that the prevailing
party is awarded
reasonable attorney's
fees.
Contracts may and often
do contain a so-called
attorney's fees
provision. Such a
provision states in
substance that the
prevailing party in an
action on a contract
shall be awarded
reasonable attorney's
fees.
The result of the
statutory or contractual
attorney's fees
provision is that the
loser pays the winner's
attorney's fees (in an
amount determined by the
Court to be
"reasonable") in
addition to its own.
If both parties are
suing each other and
each recover something,
the party who recovers
more (obtains a net
positive recovery) is
the prevailing party.
You can't change whether
there is a statute which
changes the default
rule. All you can do is
take that fact into
consideration in
deciding whether to sue
or assessing the risk of
a suit against you.
However, you can decide
whether to include an
attorney's fees
provision in your
standard form of
contract. You also can
decide whether to
negotiate for an
attorney's fees
provision (or a lack
thereof) in a contract
proposed to you.
My advice: Talk to your
lawyer (hopefully me)
about your standard form
of contract and
contracts others ask you
to sign. But if that was
all I had to say, I
wouldn't be writing this
article, because it
would be the lawyer
equivalent of your
dentist telling you to
floss your teeth. You
already know that you
should, whether you
actually do or not.
Instead, this article
will be the first of
several to tell you
about several less known
aspects of this
attorney's fees issue
which you should know
about. Each of these
aspects now only can
happen, but have
happened recently in my
practice, and can make a
big difference.
Default - Attorney's
fees provision applies
to any action on
a contract
The default rule is that
a contractual attorney's
fees provision applies
to any action on
a contract. A contract
generally involves two
promises. One is to pay
in return for
performance. The other
is to perform in return
for payment. Thus, as a
practical matter, an
action on a contract
usually will be either
an action for
non-payment or an action
for non-performance.
Putting this in context,
on a construction
project, in an action on
a contract between a
general contractor and a
subcontractor, the
attorney's fees
provision would apply to
both an action by the
subcontractor against
the general contractor
for non-payment, and
also to an action by the
general contractor
against the
subcontractor for
non-performance.
Similarly in a
non-construction context
such as a contract
between a customer and a
vendor, the attorney's
fees provision would
apply to both an action
by the vendor against
the customer for
non-payment, and also to
an action by the
customer against the
vendor for
non-performance.
Do you want an
attorney's fees
provision in the
contract?
Whether you or the other
party drafted the
contract, you need to
decide whether you want
the contract to contain
an attorney's fees
provision. That decision
depends on your
assessment of whether
you or the other
contracting party is
more likely to benefit
from it. This assessment
is easier said than
done, since it is
difficult to foretell
the future. Yet, there
are some practical
guidelines.
The following
illustration involves a
construction
subcontract. However,
the same considerations
would apply equally in a
non-construction
context, such as a
contract between a
customer and a vendor.
Generally an action for
non-payment is more
likely than an action
for non-performance.
This doesn't mean that
most contracting parties
who are promising
payment (as opposed to
performance) are
deadbeats. Rather, if,
for example, a
subcontractor doesn't
perform, the general
contractor usually
doesn't sue for
non-performance, but
instead withholds
payment. In this
scenario, even though
the root cause may be
the subcontractor's
insufficient
performance, the lawsuit
is filed by the
subcontractor, not the
general contractor, and
is for non-payment, not
insufficient
performance.
Continuing this
scenario, just because
the subcontractor
initiated the lawsuit
and alleged non-payment
doesn't mean that the
subcontractor will win.
However, the general
contractor has to win on
two issues. First
is the obvious one, that
the subcontractor did
not properly perform.
Second is less obvious,
that the general
contractor did not
over-withhold payment
for such
non-performance.
To illustrate, consider
the hypothetical
situation where the
subcontractor did not
properly perform.
As a result of such
improper performance,
the general contractor
is entitled to damages
of $100,000. However,
the general contractor
withheld $200,000. Even
though the general
contractor successfully
proved the
subcontractor's improper
performance, for
attorney's fees purposes
the general contractor
may be the losing
party because it
over-withheld payment,
and have to pay the
subcontractor's
attorney's fees in
addition to its own.
One answer is that the
general contractor not
over-withhold. But that
is easier said than
done. First, it often is
difficult to assess up
front the value of the
non-performance. Second,
if the subcontractor's
financial condition is
tenuous (not uncommon),
withholding money may
the general contractor's
only practical remedy.
If the general
contractor
under-withholds, it may
win the lawsuit, but if
it can't collect
(including the
attorney's fees award),
then the judgment has no
more practical value
than a wall plaque.
Thus, the common wisdom
is that you want an
attorney's fees
provision if you are the
party who will be
seeking payment, but not
if you instead are the
party who will be
seeking performance.
Therefore, in a contract
between an owner and a
general contractor,
often the general
contractor will want an
attorney's fees
provision, whereas the
owner won't. Conversely,
in a contract between a
general contractor and a
subcontractor, often the
subcontractor will want
an attorney's fees
provision, whereas the
general contractor
won't. Similarly in a
non-construction
context, often the
vendor will want an
attorney's fees
provision, whereas the
customer won't.
However, there is an
alternative.
Restricting the type of
contract action to which
the attorney's fees
provision applies
Let's say you're the
party who is paying
money in return for
performance, such as a
general contractor
entering into a contract
with a subcontractor, or
a customer buying
equipment or services
from a vendor. Wouldn't
it be nice if you could
limit the attorney's
fees provision to suits
for performance, and not
include suits for
payment? In other words,
on a suit for
performance, the winner
gets awarded attorney's
fees from the loser, but
on a suit for payment,
each party bears their
own attorney's fees,
regardless of who wins.
The answer is this is
possible,
provided you follow
certain rules.
Specifically, Civil Code
§1717(a), second
paragraph, provides:
"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."
This means it is not
enough to limit the
attorney's fees
provision to certain
types of action, such as
actions for performance,
but not for payment. Two
other requirements must
be met:
1. Each party, as
a factual matter, must
be "represented by
counsel in the
negotiation and
execution of the
contract."
2. As a matter of
contract documentation,
"the fact of that
representation is
specified in the
contract."
The second requirement
is as important as the
first. In one of my
recent cases, a large
and sophisticated surety
argued that an
attorney's fees
provision was restricted
to only a certain type
of action, for
enforcement of a
contractual indemnity
provision (which itself
will be the subject of a
forthcoming article).
The attorney's fees
provision arguably read
as the surety contended.
It also was arguable
that each party to the
contract was
"represented by counsel
in the negotiation and
execution of the
contract." However, the
language of the contract
did not state the
fact of that
representation.
Consequently, the court
rejected the surety's
argument that the
attorney's fees
provision was restricted
to only enforcement of a
contractual indemnity
provision. Instead, the
attorney's fees
provision also applied
to the general
contractor's action for
non-payment. Given that
attorney's fees in that
case ran into the
hundreds of thousands of
dollars for the
contractor and millions
of dollars for the
surety, this was a very
important issue.
Of course, meeting the
statutory requirements
for restricting the type
of contract action to
which the attorney's
fees provision applies
doesn't mean you will
recover attorney's fees
from your adversary, or
your adversary won't be
able to recover
attorney's fees from
you. You still have to
win. However,
you've increased your
chances of recovering
attorney's fees from
your adversary, and
decreased your
adversary's chances of
recovering attorney's
fees from you, by
limiting the attorney's
fees provision to an
action which you are
more likely to win, and
excluding from the scope
of the attorney's fees
provision actions of the
type you are more likely
not to win.
Closing Thoughts
This article is not a
substitute for talking
to your attorney
before you sign the
contract. Issues
concerning attorney's
fees provisions can be
complex. Too many times
clients come to me after
the fact, limiting my
role to damage control.
The saying "an ounce of
prevention is worth a
pound of cure" applies.
While this article is
not a substitute for a
law degree, knowledge is
power. Often it is
important just to
understand you have an
issue which you should
discuss with your
attorney. This article
also hopefully will
assist you in
identifying and
understanding some risks
and benefits of
attorney's fees
provisions. In
forthcoming articles,
we'll discuss other
common, and potentially
significant, issues with
attorney's fees
provisions.
We really would
appreciate your
feedback. Praise, kudos
and compliments are
always nice to hear. But
constructive suggestions
for improvement are
particularly
appreciated. There's
always room for
improvement, and your
suggestions can make
this newsletter better,
and more useful to you.
Thanks. Jeff
Jeffrey A. Kent
Poindexter & Doutré,
Inc.
624 S. Grand Ave.
Los Angeles, California
90017
213-628-8297
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