Poindexter & Doutré, Inc.

Poindexter & Doutré, Inc.  Business Litigation News

Issue 02072011

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Poindexter & Doutre LogoI'm a principal at Poindexter & Doutré. Our firm specializes in business litigation. I follow with great interest new cases, statutes and other developments that affect business litigation. The purpose of this newsletter is to pass that information to you, our clients and other friends of our firm, in an informative and timely manner. I hope you find this newsletter useful. Of course, if you have questions, comments or suggestions, please feel free to call or email me or one of our other attorneys.

 

Jeffrey A. Kent
Poindexter & Doutré, Inc.
jkent@pdlawyers.com
213-628-8297

 

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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

 

 

In This Issue

To the victor go the ... attorney's fees?...Part 1 - Stacking the Deck

 

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