News
Litigation
Aug. 16, 2002
Fee Provision in a Statute Will Trump Provision in a Contract
Focus Column - By Mitchell Chyette - Often the most important question in litigation is, "Who is going to pay the attorney fees?"
Focus Column
By Mitchell Chyette
Often the most important question in litigation is, "Who is going to pay the attorney fees?"
Under the so-called "American" rule, each party is responsible for its own attorney fees. Alyeska Pipeline Serv. v Wilderness Soc'y, 421 U.S. 240 (1975). There are two exceptions to this rule: The parties to an action can choose to allocate fees between themselves by agreement, or the Legislature can specifically provide for an award of attorney fees as a part of a statutory framework.
This rule is codified in Code of Civil Procedure Section 1021: "Except as attorneys' fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties."
A number of statutes provide for attorney fees. In Murillo v Fleetwood Enterprises Inc., 17 Cal.4th 985 (1998), the court notes that there may be as many as 151 fee-shifting statutes. Many of these are unilateral - that is, fees are available only to the successful plaintiff.
In contrast, attorney fees based on a contractual provision are bilateral as a matter of law. Under Civil Code Section 1717, if a contract provides that fees will be awarded to one party, the contract is construed as a matter of law to provide for fees to the "prevailing party." "[I]t is irrelevant if the fees were incurred offensively or defensively." Shandoan v World Sav. & Loan Ass'n, 219 Cal.App.3d 97 (1990).
What are the defendant's rights when a claim is made under a statute with a unilateral fee provision, but the contract has a bilateral fee clause? In Carver v Chevron USA, 97 Cal.App.4th 132 (2002), the court held that the defendant loses. The statute trumps the contract.
In Carver, a number of gasoline dealers sued Chevron for breach of lease, fraud and violation of the Cartwright Act. The dealers won at the Superior Court, but the appellate court reversed the jury's verdict.
On remand, Chevron moved to recover the more than $5 million in attorney fees that it had incurred in its defense. The court upheld the award of those fees directly allocable to the defense of the breach-of-the-lease claim, including the related tort claims, because the lease contained an attorney fee clause.
But the court held that fees could not be recovered for defense of the Cartwright Act claim, even if the claim essentially arose out of the breach of the lease, because that statute specifically provides that fees may only be awarded to the prevailing plaintiff.
This case could have a significant impact in other areas of law. For instance, the Unruh Act has a one-sided fee provision. Civil Code Section 52(b). Presumably, an employer who has an attorney fee clause in an employment contract cannot recover fees incurred in defending an Unruh Act claim. A bank also might not be able to rely on an attorney fee clause in a credit agreement against a claim of violation of the Fair Debt Collections Practices Act. Civil Code Section 1788.30.
Other instances of one-way attorney fee provisions include the Cartwright Act (Business and Professions Code Section 16750(a)), the federal Clayton Act (15 U.S.C. Section 15(a)), the so-called "private attorney general" rule (Code of Civil Procedure Section 1021.5) and the rule against misrepresentation of authority (Civil Code Section 3318). See also Beasely v Wells Fargo Bank, 235 Cal.App.3d 1407 (discussing allocation of attorney fees in "common fund" situation).
Carver also might have an impact on Code of Civil Procedure Section 998 demands. Under Code of Civil Procedure Section 1021.1, the court may award fees to a party who made an offer for judgment if the opposing party did not obtain a more favorable judgment. Under Carver, however, even if the defendant prevails on the contract, the defendant might not be awarded attorney fees because the fee-shifting provision of Section 998 is held to trump the contract. In addition, a court might hold that a defendant who made a Section 998 offer cannot collect the attorney fees because the statute on which the plaintiff relied had a unilateral fees provision.
Counsel also must be cognizant of Carver in keeping their time records. Where some fees are attributable to claims covered by the contract and others are not, the court may allocate the award. Reynolds Metals Co. v Alperson, 25 Cal.3d 124 (1979). It will assist the court in making that allocation determination if the time records reflect the nature of the work being done and the claim to which the work is directed.
The Carver decision also is remarkable in that the rule is different when it comes to all other forms of "costs."
In Murillo v Fleetwood Enterprises, 17 Cal.4th 985 (1998), the Supreme Court dealt with the conflict between Code of Civil Procedure Section 1032(b), which gives any prevailing party a right to recover costs, and the provision in the Song-Beverly Act (Civil Code Section 1790 et seq, the so-called "Lemon Law") that specifically provides for an award of costs and attorney fees to the prevailing buyer (Civil Code Section 1794(d)).
The court held that the defending seller was entitled to recover its costs. The Song-Beverly Act, the court reasoned, did not necessarily conflict with Section 1032. One act allowed costs to the plaintiff, the other allowed costs to the prevailing party. The Song-Beverly Act did not expressly preclude recovery of costs pursuant to Section 1032. "We note that when the Legislature intends to restrict the recovery of costs to just one side of a lawsuit, it knows how to express such restriction."
In Carver, the court noted that the opening clause of Section 1021 - "[e]xcept as attorney's fees are specifically provided for by statute" - was such a reservation. But the Supreme Court in Murillo rejected that very argument in connection with the same language that appears in Section 1032.
Carver distinguished Murillo on the ground that it dealt only with "costs" and not attorney fees. In Murillo, the court noted that there is no "default" provision awarding attorney fees to the prevailing party the way that Section 1032 awards costs.
But when attorney fees are available, the fees are "costs." Code of Civil Procedure Section 1033.5. The Murillo court was not distinguishing attorney fees under Section 1033.5 but was explaining that its decision would not affect fees available under other statutory provisions.
The Carver court was concerned that allowing the defendant its fees would contradict the Legislative intent behind providing for a one-way fee provision. Quoting Covenant Mutual Insurance Co. v Young, 179 Cal.App.3d 318 (1986), the court noted, "'The fact lawmakers offer a bounty for plaintiffs who sue to enforce a right the Legislature has chosen to favor in no sense implies it intends to offer the same bounty to defendants who show they have not violated the right. Indeed the more logical explanation is that the Legislature desires to encourage injured parties to seek redress - and thus simultaneously enforce public policy - in situations where they otherwise would not find it economical to sue.'"
Granted, a one-side attorney fee provision in a statute expresses a Legislative intent to assist plaintiffs in enforcing public policy. But a contractual provision for attorney fees does not necessarily remove this incentive. Where a contract provides for attorney fees, however, the prevailing plaintiff still would be entitled to compensation for its fees.
The only difference is that where the claim of fees is based on a contract, the plaintiff also must face the consequences of paying fees to the defendant if his case proves unworthy. In his dissent in Murillo, Justice Stanley Mosk observed that the risk of loss might deter plaintiffs from making Lemon Law claims. But the majority rejected this argument.
Until the courts or Legislature address this issue again, however, the rule is that attorney fees are not available to a prevailing defendant under contract where there is a countervailing unilateral fee provision in the statute.
Mitchell Chyette is a business litigation attorney and of-counsel at Leland, Parachini, Steinberg, Matzger & Melnick.
By Mitchell Chyette
Often the most important question in litigation is, "Who is going to pay the attorney fees?"
Under the so-called "American" rule, each party is responsible for its own attorney fees. Alyeska Pipeline Serv. v Wilderness Soc'y, 421 U.S. 240 (1975). There are two exceptions to this rule: The parties to an action can choose to allocate fees between themselves by agreement, or the Legislature can specifically provide for an award of attorney fees as a part of a statutory framework.
This rule is codified in Code of Civil Procedure Section 1021: "Except as attorneys' fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties."
A number of statutes provide for attorney fees. In Murillo v Fleetwood Enterprises Inc., 17 Cal.4th 985 (1998), the court notes that there may be as many as 151 fee-shifting statutes. Many of these are unilateral - that is, fees are available only to the successful plaintiff.
In contrast, attorney fees based on a contractual provision are bilateral as a matter of law. Under Civil Code Section 1717, if a contract provides that fees will be awarded to one party, the contract is construed as a matter of law to provide for fees to the "prevailing party." "[I]t is irrelevant if the fees were incurred offensively or defensively." Shandoan v World Sav. & Loan Ass'n, 219 Cal.App.3d 97 (1990).
What are the defendant's rights when a claim is made under a statute with a unilateral fee provision, but the contract has a bilateral fee clause? In Carver v Chevron USA, 97 Cal.App.4th 132 (2002), the court held that the defendant loses. The statute trumps the contract.
In Carver, a number of gasoline dealers sued Chevron for breach of lease, fraud and violation of the Cartwright Act. The dealers won at the Superior Court, but the appellate court reversed the jury's verdict.
On remand, Chevron moved to recover the more than $5 million in attorney fees that it had incurred in its defense. The court upheld the award of those fees directly allocable to the defense of the breach-of-the-lease claim, including the related tort claims, because the lease contained an attorney fee clause.
But the court held that fees could not be recovered for defense of the Cartwright Act claim, even if the claim essentially arose out of the breach of the lease, because that statute specifically provides that fees may only be awarded to the prevailing plaintiff.
This case could have a significant impact in other areas of law. For instance, the Unruh Act has a one-sided fee provision. Civil Code Section 52(b). Presumably, an employer who has an attorney fee clause in an employment contract cannot recover fees incurred in defending an Unruh Act claim. A bank also might not be able to rely on an attorney fee clause in a credit agreement against a claim of violation of the Fair Debt Collections Practices Act. Civil Code Section 1788.30.
Other instances of one-way attorney fee provisions include the Cartwright Act (Business and Professions Code Section 16750(a)), the federal Clayton Act (15 U.S.C. Section 15(a)), the so-called "private attorney general" rule (Code of Civil Procedure Section 1021.5) and the rule against misrepresentation of authority (Civil Code Section 3318). See also Beasely v Wells Fargo Bank, 235 Cal.App.3d 1407 (discussing allocation of attorney fees in "common fund" situation).
Carver also might have an impact on Code of Civil Procedure Section 998 demands. Under Code of Civil Procedure Section 1021.1, the court may award fees to a party who made an offer for judgment if the opposing party did not obtain a more favorable judgment. Under Carver, however, even if the defendant prevails on the contract, the defendant might not be awarded attorney fees because the fee-shifting provision of Section 998 is held to trump the contract. In addition, a court might hold that a defendant who made a Section 998 offer cannot collect the attorney fees because the statute on which the plaintiff relied had a unilateral fees provision.
Counsel also must be cognizant of Carver in keeping their time records. Where some fees are attributable to claims covered by the contract and others are not, the court may allocate the award. Reynolds Metals Co. v Alperson, 25 Cal.3d 124 (1979). It will assist the court in making that allocation determination if the time records reflect the nature of the work being done and the claim to which the work is directed.
The Carver decision also is remarkable in that the rule is different when it comes to all other forms of "costs."
In Murillo v Fleetwood Enterprises, 17 Cal.4th 985 (1998), the Supreme Court dealt with the conflict between Code of Civil Procedure Section 1032(b), which gives any prevailing party a right to recover costs, and the provision in the Song-Beverly Act (Civil Code Section 1790 et seq, the so-called "Lemon Law") that specifically provides for an award of costs and attorney fees to the prevailing buyer (Civil Code Section 1794(d)).
The court held that the defending seller was entitled to recover its costs. The Song-Beverly Act, the court reasoned, did not necessarily conflict with Section 1032. One act allowed costs to the plaintiff, the other allowed costs to the prevailing party. The Song-Beverly Act did not expressly preclude recovery of costs pursuant to Section 1032. "We note that when the Legislature intends to restrict the recovery of costs to just one side of a lawsuit, it knows how to express such restriction."
In Carver, the court noted that the opening clause of Section 1021 - "[e]xcept as attorney's fees are specifically provided for by statute" - was such a reservation. But the Supreme Court in Murillo rejected that very argument in connection with the same language that appears in Section 1032.
Carver distinguished Murillo on the ground that it dealt only with "costs" and not attorney fees. In Murillo, the court noted that there is no "default" provision awarding attorney fees to the prevailing party the way that Section 1032 awards costs.
But when attorney fees are available, the fees are "costs." Code of Civil Procedure Section 1033.5. The Murillo court was not distinguishing attorney fees under Section 1033.5 but was explaining that its decision would not affect fees available under other statutory provisions.
The Carver court was concerned that allowing the defendant its fees would contradict the Legislative intent behind providing for a one-way fee provision. Quoting Covenant Mutual Insurance Co. v Young, 179 Cal.App.3d 318 (1986), the court noted, "'The fact lawmakers offer a bounty for plaintiffs who sue to enforce a right the Legislature has chosen to favor in no sense implies it intends to offer the same bounty to defendants who show they have not violated the right. Indeed the more logical explanation is that the Legislature desires to encourage injured parties to seek redress - and thus simultaneously enforce public policy - in situations where they otherwise would not find it economical to sue.'"
Granted, a one-side attorney fee provision in a statute expresses a Legislative intent to assist plaintiffs in enforcing public policy. But a contractual provision for attorney fees does not necessarily remove this incentive. Where a contract provides for attorney fees, however, the prevailing plaintiff still would be entitled to compensation for its fees.
The only difference is that where the claim of fees is based on a contract, the plaintiff also must face the consequences of paying fees to the defendant if his case proves unworthy. In his dissent in Murillo, Justice Stanley Mosk observed that the risk of loss might deter plaintiffs from making Lemon Law claims. But the majority rejected this argument.
Until the courts or Legislature address this issue again, however, the rule is that attorney fees are not available to a prevailing defendant under contract where there is a countervailing unilateral fee provision in the statute.
Mitchell Chyette is a business litigation attorney and of-counsel at Leland, Parachini, Steinberg, Matzger & Melnick.
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