The availability of a substantial attorney’s fee award for the prevailing party is often a highly significant factor in settlement negotiations in real estate and partnership disputes. Indeed, the very prospect of losing a case and then facing two legal bills, not only one from the party’s own lawyer but from the other side’s counsel as well, can influence the decision whether to file a claim or counterclaim at all. Based upon our trial experience, there are a number of important factors which counsel drafting real estate or partnership agreements need to consider in order to maximize the advantages made available under California law, and they should also be considered by litigators deciding which kinds of claims should be made. Here are some of the key points to bear in mind.
First, while some attorney’s fees clauses mention mediation, most do not specifically render it a pre-condition to the obtaining of attorney’s fees. Further, if there is also an arbitration clause in the agreement, many fee shifting clauses do not make mediation a pre-condition to initiating arbitration. Since courts will generally enforce such preconditions, it makes a big difference whether the wording of a particular clause makes mediation a precondition to either arbitration and/or to obtaining attorney’s fees. If it is the former, then a respondent who proceeds to arbitration before mediation but without raising an objection will likely be waiving the condition. See Mt. Holyoke Homes, LP v. California Costal Commission (2008) 167 Cal.App.4th 830. Then, if they lose, they could end up paying the other side’s attorney’s fees. Frei v. Davey (2004) 124 Cal.App.4th 1506.
Second, an issue which frequently comes up is whether attorney’s fees are awardable only for contract claims and not, for example, for tort claims or breaches of fiduciary duty. Here again, the breadth of the contract language is critical. If the attorney’s fees clause has a dragnet feature that requires the payment of attorney’s fees to the prevailing party in “any dispute arising out of or related to this agreement,” then it is well-established that a tort claim alone, even in the absence of a contract claim, may trigger the attorney’s fee obligation since such a tort claim may well be related to or arise out of the agreement. See Santisas v. Goodin (1998) 17 Cal.4th 599. But once prevailing party status is determined, then all reasonable fees are recoverable for time spent, even on lost issues and especially if all of the issues were interrelated. Graciano v. Robinson (2006) 144 Cal.App.4th 140. This is also true if a particular cause of action is a hybrid one, such as breach of fiduciary duty (arising both under law and under contract), in which case the pleading party may elect to proceed with the contract-based nature. Fairchild v. Park (2001) 90 Cal.App.4th 919.
But what if a party wins a number of claims but loses others—is there an attorney fee obligation under those circumstances? The answer is that the court has discretion to determine, in any given situation, whether there is a prevailing party or not. So, for example, if one party wins as many significant issues as it loses, then there may be no prevailing party at all, and hence no attorney’s fees. But if there is a clear-cut winner, the Court or the arbitrator must award attorney’s fees to the prevailing party, which the law generally defines as the party who obtained the “greater relief.” CC § 1717; Hsu v. Abbara (1995) 9 Cal.4th 863. However, a party who prevails but at the same time engages in making frivolous and time-consuming claims can have its attorney’s fees reduced substantially for the time spent in litigating those unnecessary issues. EnPalm LLC v. Teitler Family Trust (2008) 162 Cal.App.4th 770.
Another critical issue has to do with fees charged by expert witnesses, usually a very significant cost in complex partnership and real estate litigation. Unless the attorney’s fees clause specifically provides for experts, then it has been held that C.C.P. § 1033.5, generally allowing only for “costs” to the prevailing party, does not include expert’s costs, even if the partnership agreement allows for attorney’s fees. So, too, for other expenses that are not compensable under law but both those costs, as well as experts fees, are compensable if the agreement’s fee shifting clause permits them. Thrifty Payless, Inc. v. Mariners (2010) 185 Cal.App.4th 1050. So, drafters beware.
Finally, a key tool in creating leverage for settlement negotiations is C.C.P. § 998, and it is particularly effective when an attorney’s fees clause is involved. Under that code section, a defending party can offer to resolve the case for a certain amount of money and, if the other side does not accept that offer in a timely manner, then the non-accepting party can be responsible for paying the offering party’s post-offer attorney’s fees even if he or she prevailed at trial so long as they obtained less than the amount of the offer. Scott Co. v. Blount, Inc.(1999) 20 Cal.4th 1103. Early timing of such an offer is obviously advisable for maximum effect.
As may be seen from these examples, just how attorney’s fees clauses are worded can make a big difference in the evaluation of whether to file a claim at all, in settlement strategy, and, of course, in determining what claims will be maintained and which will be left on the cutting room floor.
For more questions, please contact William H. G. Norman at (415) 765-6236 or at email@example.com.
***This article was published in the Fall 2012 issue of Dunn on Damages: The Economic Damages Report for Litigators and Experts.