California’s Contractual Attorney Fee Statutes Require Revision

Successful California litigants may recover attorney fees when authorized by contract under Code of Civil Procedure sections 1032 and 1033.5.  Respectively, these statutes permit the prevailing party in civil litigation to recover costs and define “costs” to include attorney fees if authorized by contract among other things.

While the right to recover contractual attorney fees is clear generally, it plays out in practice in very different ways.   The contractual language, causes of action asserted by the plaintiff, how different causes of action are resolved, and the reasonableness of fee requests all determine whether California courts can and should award them.  Thus, the right to contractual attorney fees is complicated, situational, and not without traps for the unwary.

No small measure of the complication is due to a failure by the California Legislature over time and the California Supreme Court in Santisas v. Goodin (1998) 17 Cal.4th 599 to extend the public policy-based limits on contractual fee awards beyond contract causes of action. Yet, there is no good public policy reason to restrict them so.

There are sound reasons for treating contractual fee awards arising from non-contract causes of action the same way as fee awards arising from contract causes of action.  Treating contract causes of action and tort causes of action the same is good for parties negotiating contracts; it is far easier for them to forecast how the rights in fee provisions might play out.  It discourages excessive negotiations about fee provisions.  It might encourage wider application of California law in commercial contracts.

Moreover, treating different causes of action uniformly for purposes of contractual fee awards relieves trial courts of the burden of engaging in a complex weighing of factors regarding attorney fee awards.  That weighing is a core judicial function that should be reserved for parties’ substantive rights for the sake of efficiency.  Moreover, the complexity of fee awards gives rise to unnecessary traps for parties, invites sophisticated parties to contracts to insert onerous provisions relating to non-contract causes of action to their advantage, and creates some obscure traps for unwary plaintiffs and defendants alike.

A little background is in order:

In California, the contractual right to attorney fees is a modification of the “American rule”, which generally requires litigants to bear their own attorney fees in civil litigation around the U.S.  The American rule itself is codified in California, albeit subject to the parties’ freedom to allocate attorney fees in contract.  (See generally Code Civ. Pro. § 1021.)  In contrast, countries like England have as a rule long permitted the successful litigant to obtain fees against the other side in civil litigation with or without a contract.

While Sections 1032 and 1033.5 authorize courts to award of attorney fees when contracts provide for them, Civil Code section 1717 for the most part interprets them.

Central language of Civil Code section 1717 is provided for in Subsection (a).  It states in part:

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.

“The primary purpose of this language is to ensure mutuality of remedy for attorney fee claims under contractual attorney fee provisions.”  (Santisas v. Goodin (1998) 17 Cal.4th 599, 610.)  The statute was intended to limit unfair fee provisions in contracts by applying them in favor of the prevailing party “‘whether he or she is the party specified in the contract or not.’”  (Ibid. [quoting Section 1717(a)]; see also Khan v. Shim (2016) 7 Cal.App.5th 49, 56 [Section 1717 was enacted to ban “unfair one sided fee provisions”].) 

The statute contains a few other provisions that support this purpose.  “Where a contract provides for attorney’s fees . . . 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.” (Civ. Code § 1717(a).)  “The express purpose” of this paragraph was to overturn an appellate opinion holding that “parties could limit the forms of action to which attorney’s fee might be applicable and section 1717 extended only to those types of actions provided for in the contract.” (Sears v. Baccaglio (1998) 60 Cal. App. 4th 1136 [citing Sciarrotta v. Teaford Custom Remodeling, Inc. (1980) 110 Cal. App. 3d 444.)

To ensure an attorney fee provision remains mutual when a defendant successfully defends a contract claim on the grounds that the agreement is void, unenforceable or should rescind them, the California Supreme Court has held that defendants are prevailing parties even though the contract is unenforceable.  (Santisas v. Goodin, supra, 17 Cal.4th p. 610, quoting Reynolds Metals Co. v. Alperson (1979) 25 Cal. 3d 124, 128.)

Section 1717’s elevation of fairness over private parties’ freedom of contract comes with an important limitation. The statute’s introductory phrase – “[i]n any action on a contract” – limits its application to contractual attorneys fees to cases involving an “action on a contract.”  “[S]ection 1717 applies only to actions that contain at least one contract claim.”  (Santisas v. Goodin, supra, 17 Cal.4th p. 615.)  “If an action asserts both contract and tort or other noncontract claims, section 1717 applies only to attorney fees incurred to litigate the contract claims.”  (Ibid.

Decades ago, courts cited Section 1717 to bar fee awards for claims other than contract claims.  (Schlocker v. Schlocker (1976) 62 Cal. App. 3d 921, 133 [reversing a trial court judgment awarding fees to the prevailing defendant in a fraud action because Section 1717 “gives no authority” for such an award . . .[;] “the suit was not, as the statute requires, on the contract but in tort for fraud”], Reynolds Metals Co. v. Alperson, supra, 25 Cal. 3d 124, p. 129 [“Where a cause of action based on the contract providing for attorney’s fees is joined with other causes of action beyond the contract, the prevailing party may recover attorney’s fees under section 1717 only as they relate to the contract action.”].)  In doing so, they sometimes interpreted the provision’s phrase “incurred to enforce the provisions of [the] contract” – to prohibit fee awards for non-contract claims.  (E.g. Reynolds Metals Co. v. Alperson, supra, 25 Cal. 3d 124 p. 158 [“[S]ection 1717 specifically refers to fees “incurred to enforce the provisions of [the] contract.”  A litigant may not increase his recovery of attorney’s fees by joining a cause of action in which attorney’s fees are not recoverable to one in which an award is proper.”], Stout v. Turney (1978) 22 Cal. 3d 718, 730 [denying fees under Section 1717 on a fraud claim because “[a] tort action for fraud arising out of a contract is not, however, an action ‘on a contract’ within the meaning of this section.”].)

To the extent these cases reached blanket conclusions about the applicability of fee provisions to tort claims without consideration of the fee provision’s scope, these older cases arguably misread the statute; Section 1717 is a statute of interpretation rather than authorization.  It interprets contractual fee provisions to be reciprocal despite the parties’ intent and defines key language regarding “prevailing parties” so as bar contractual fee awards following a voluntary dismissal.

These cases have not been followed recently to deny contractual attorneys fees for litigating tort claims.  (See Santisas v. Goodin, supra, 17 Cal.4th p. 615 and Khan v. Shim, supra, 7 Cal.App.5th 49.)  Thus, while fairness prevails over the freedom of contract when a plaintiff chooses to bring only a contract cause of action, unbridled freedom of contract apparently prevails over fairness when a plaintiff adds a tort or other non-contract cause of action to her contract cause of action or brings solely tort claims. Nothing in Section 1717 prevents a sophisticated contracting party from drafting a one-sided attorney fee provision in consumer contracts or otherwise in anticipation that tort claims might be brought against it.  This should not be but is currently the law of the land in California.

Section 1717 comes with yet another public policy-based limitation.   When a plaintiff or cross-complainant files a voluntary dismissal, it interprets “prevailing party” to exclude the defendant.  (Civ. Code § 1717(b)(2) [“Where an action has been voluntarily dismissed or dismissed pursuant to a settlement of the case, there shall be no prevailing party for purposes of this section.”].)  The purpose of this limitation is to resolve a “Hobson’s choice.”  In the words of the California Supreme Court, whose opinion was codified by subsection (b)(2),

In pretrial dismissal cases, we are faced with a Hobson’s choice of either (1) adopting an automatic right to attorney fees, thereby encouraging the maintenance of pointless litigation and violating the equitable principles which should govern attorney fee clauses, (2) providing for application of equitable considerations, requiring use of scarce judicial resources for trial of the merits of dismissed actions, or (3) continuing the former rule, denying attorney fees in spite of agreement. We are satisfied that concern for the efficient and equitable administration of justice requires that the parties in pretrial dismissal cases be left to bear their own attorney fees . . . (International Industries, Inc. v. Olen (1978) 21 Cal. 3d 218, 224-225.)

In Olen, the California Supreme Court chose the third answer to its Hobson’s choice in denying attorney’s fees to the defendants following pre-trial voluntary dismissal of an action against sublessees for breach of a sublease.  It cited the “equitable administration of justice” as the driving policy rationale.  The court in Olen did not want courts spending large amounts of time deciding motions for contractual attorney fees.

The Legislature amended Section 1717 to adopt the California Supreme Court’s holding in Olen by adding subsection (b)(2).  Even though the public policy concerns identified in Olen apply equally to non-contract causes of action, the Legislature took no steps to widen Section 1717’s reach.

From this inaction, the California Supreme Court in Santisas soon found legislative intent.  In Santisas the Supreme Court reversed an appellate decision that denied the defendants their fees after a plaintiff voluntarily dismissed an action that asserted a combination of contract and tort claims, including negligence and fraud. (Santisas v. Goodin, supra, 17 Cal.4th pp. 602, 622-633.)  The court rejected the holding of Jue v. Patton (1995) 33 Cal.App.4th 456, which had cited Olen’s concerns about the fair administration of justice to deny contractual attorney fee awards anytime a plaintiff voluntarily dismisses an action no matter the cause of action.  (See id. at p. 619, disapproving  Jue v. Patton, supra33 Cal.App.4th 456.)  Instead, the Olen court noted that the Legislature had not acted to expand the scope of section 1717 to encompass tort and other noncontract claims arising from contracts containing broadly worded attorney fee provisions.  Similarly, it noted that the Legislature did not enact separate legislation to address such claims or otherwise articulate public policy as permitting or precluding attorney fee awards as costs for such claims.

The Supreme Court also revisited the concerns it expressed in Olen about the administration of justice.  It stated that “we are of the view that the practical difficulties associated with contractual attorney fee cost determinations in voluntary pretrial dismissal cases are not as great as suggested in Olen.  Thus, it departed from its prior response to the Hobson’s choice identified in Olen, now adopting the Olen court’s Option 2.  (International v. Olen, supra, 21 Cal. 3d pp. 224-225 [applying “equitable considerations, requiring use of scarce judicial resources for trial of the merits of dismissed actions”].)

The Supreme Court erred in departing from Olens public policy choice.  There was no reason to do.  The Legislature fully supported it the first time and there is no reason to think the Legislature would not also have supported a natural extension of its holding to other causes of action.  The Supreme Court should have been of the view that the practical difficulties associated with fee determinations outweigh any possible benefit of allowing fees in non-contract actions.

The California Supreme Court’s departure from its reasoning in Olen for tort cases gives rise to unnecessarily complex decision-making.  First courts have to decide whether and to what causes of action an attorney fee provision might apply.  Second, courts must consider voluntary dismissals of non-contract causes of action and award fees on those.  Third, courts have to consider who prevailed on remaining causes of action.  If someone prevails at trial on a contract cause of action but loses on other causes of action, courts have to award fees under the contract cause of action under Subsection (c) of Civil Code section 1717.  If the fee award on the contract claim exceeds the amount of the judgment on the other claims, the court must find that the winner of the contract claim is the prevailing party on all claims.  Courts then must allocate if they can, fees between different causes of action.  Courts can then go on to consider the reasonableness of fees, an exercise that often results in the deposition of opposing counsel.  In short, fee applications themselves can metastasize into expensive derivative litigation squarely on the back of one or both of the litigants.

The California Supreme Court in Santisas failed to appreciate the added layer complexity in attorney fee award calculations when some causes of action are treated differently from other causes of action for purposes of contractual fee awards.  Courts’ limited time for civil litigation in this state should be spent on weighing parties’ substantive rights – not rendering overly complicated contractual fee determinations.

Limiting Section 1717 to contract causes of action is bad policy for other reasons.  It defeats the policy behind the statute.  Intended to limit unfair attorney fee provisions by allocating the risk of a fee award equally to the parties, the provision is unable fully to accomplish its purpose if parties can avoid its reciprocity by adding tort claims to contract actions.  Public policy should discourage rather than encourage parties from overburdening the court system with claims that are not pursued for their merit but rather for fees.

The court’s reliance on legislative inaction in Santisas was also unnecessary.  Legislative inaction did not stop the court in Olen when it made a bright-line rule against attorney fee awards in contract actions following voluntary dismissals by the plaintiff.  The Legislature had fully supported that decision.  There is no reason to think it would not have fully supported a further extension of Olen’s holdingLegislative inaction did not stop the California Supreme Court from extending the application of the Section 1717 to situations where the defendant successfully argues that the contract is unenforceable. 

Maintaining a cause-of-action based right to contractual attorney fees creates a trap for the unwary plaintiff who thinks she is doing right by all through the voluntary dismissal of tort claims before trial.  As a result of a Santisas plaintiffs need to watch their backs in conceding bad non-contract claims when they would be doing everyone a favor of conceding early what must be conceded.  The same can be said for defendants in tort actions, who are now required to pay careful attention to the language of fee provisions as they consider and make 998 offers and otherwise litigate cases.  Perfecting rights to attorney fees early in cases hardens litigants’ position and makes settlement more difficult.

Treating contract causes of action and tort causes of action the same has other benefits as well.  As a preliminary matter, California has some interest in broadening the reach of its laws.  Commercial parties within and without the state are more likely to choose California law if they can forecast with a reasonable degree of certainty what their agreement generally means when a dispute arises.   The added clarity decreases the cost of negotiating some commercial contracts. 

In sum, the court’s reliance on legislative inaction in Santisas is matched and then some by the many sound reasons for treating tort and contract claims need to be treated the same for purposes of contractual fee awards.  Either the legislature or the Supreme Court should step in to fix an overly complicated area of the law once and for all.

John Claassen is an experienced commercial litigator.  He practices from the offices of Claassen, P.C. in Oakland, California.  For more information about his firm, please click here.  While this blog entry is published for informational purposes, portions of this blog post may constitute “communications” within the meaning of California Rule of Professional Conduct 1-400.  Thus, as a possible "Advertisement" it is not intended to constitute legal advice.  Similarly, no statement made in this blog post is intended as a guarantee, warranty, or promise about the outcome of any litigation matter taken on by the firm.  This Advertisement is not intended for any matter that would require the rendition of legal services outside of the State of California or under the laws of any jurisdiction outside of the State of California. Copyright 2017.  All rights reserved.