One of the sad truths a business litigation lawyer must explain to their client is that sometimes the cost of going to court exceeds the amount of damages that can be recovered. This is true because in California, unless there is a special statute that allows the recovery of attorneys' fees, those fees are not recoverable unless they are required by a written contract. This is one of the problems with an oral agreement; if a party breaches the agreement, the aggrieved party is not entitled to recover attorneys' fees. Because of this rule, arguably the most important clause in a contract can be the attorney fee provision. This is the second installment of a multi-part blog that explains some of the more common provisions found in California agreements.
Unilateral Attorney Fee Clauses. In some states unilateral attorney fees provisions are permitted. An example of a unilateral attorney fee clause would be a clause that says if Company A has to sue Company B and prevails, Company B must pay Company A's attorney fees. This leaves Company B with no attorney fees if it wins. In California unilateral attorney fee provisions are automatically construed to be reciprocal under Civil Code section 1717. Therefore, in the example above, Company A would still be allowed attorney fees even though the contract seemed to provide for attorneys' fees only if company B won. Part 1 of this blog dealt with Choice of Law, Jurisdiction and Venue provisions. This is an excellent example of why choice of law provisions are critical. In California, unilateral attorney fee clauses are not allowed, in other states they are.
When To Leave It Out. There are occasions when you may not want an attorney fee provision in your contract. The most common instance is if you are the party with greater resources and you fear you may be a target of a malicious lawsuit. If you know you can outspend the other side with legal fire power and you suspect there may be a suit later on, then you may prefer to leave out an attorney fee provision to discourage potential litigants. As a general rule, if you are afraid you do not have the resources to enforce a contract, you need an attorney fee provision. If lawsuits are factored into your company's budget as part of the cost of doing business and your company is a frequent litigation target, you may want to leave the attorney fee provision out of the contract.
What is Covered? Even though attorney fee provisions are considered "standard", there truly is no "standard" provision. Consult an attorney to make sure the provision in your contract is broad enough to cover all possible scenarios. For example, if a clause states that it covers attorney fees for a party "prevailing at trial" for actions"arising from the contract" what happens if the parties have disputes that arise in tort or are tangential to the contract? Similarly, what if the parties arbitrate the claim instead of going to trial? The clause may not be broad enough to allow for attorney fees in these situations. There is an excellent legal blog that is dedicated to nothing but the subject of attorney fee awards in California. A quick review of that extensive blog demonstrates that attorney fees clauses are anything but standard.
Adina T. Stern has been drafting and reviewing real estate agreements, business contracts and horse related forms for nearly thirty years in and around Los Angeles, Orange, San Diego, San Gabriel, and Riverside Counties.