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Draft Clause Carefully to Avoid Recovery of Attorney’s Fees in Tort
Real Estate Newsletter
A defendant who is bound by a contractual attorney’s fees provision may face a considerable risk that he or she gets left “picking up the tab” for plaintiff’s attorney’s fees, even if the plaintiff recovers only a nominal sum at trial. Many of us have been faced with a scenario in which the defendant has minimal exposure and what appears to be a palpable chance to settle the lawsuit without the expense of trial. However, if the plaintiff’s attorney’s fees potentially exceed the value of the claim, the plaintiff has incentive to “roll the dice,” with the hope of recovering his or her attorney’s fees rather than negotiating a reasonable settlement. When the claims against the defendant are not limited to contract but include breach of common law duties, the outcome may be laden with uncertainty because the standards governing liability in tort are not always clearly defined. If your client is more likely to be on the receiving end of a lawsuit, the careful drafting of attorney’s fees clauses to avoid fee recovery on the tort causes of action can help eliminate added risk and level the playing field for settlement.
Two “rules of thumb” apply to limit fee recovery:
1. Keep the subject matter of the attorney’s fees clause narrowly tailored to the contract. Clauses that provide for the recovery of attorney’s fees in an action to “enforce the contract” or in the event of “breach of” or “default under” the contract will be narrowly construed to avoid recovery in tort. Avoid phrases such as “arising out of” or “related to” the agreement, which will broaden the fee clause and make it applicable to noncontract claims.
2. Draft the attorney’s fees clause so that it is unilateral in your client’s favor, rather than in favor of the “prevailing party.” Although unilateral fees clauses will be treated as reciprocal in contract, reciprocity will not apply in tort.
Limit the Focus of the Clause to Contract Claims
Cal. Civ. Code §1717 governs the award of contractual attorney’s fees and costs to the party who prevails in “any action on a contract.” The court in Hsu v. Abbara, 9 Cal.4th 863, 873-874 (1995), noted that §1717 was amended in 1987 to replace the term “prevailing party” with the term “party prevailing on the contract,” to emphasize that a party’s success on a noncontract claim was irrelevant to the determination of the prevailing party.
With §1717 as a reference point, the drafter may avoid having the attorney’s fees clause spill over to tort causes of action if it is drafted narrowly to apply only to the contract claims. For example, in 1979, the court in Reynolds Metals Co. v. Alpherson, 25 Cal.3d 124, 129, held that a clause in a promissory note that provided for the recovery of attorney’s fees in the event of a “default” would apply to the claims on the promissory note but not the tort claims.
In contrast, more recent courts have concluded that broadly worded fee clauses that provide for recovery by the prevailing party in any action “arising out of” or “related to” the contract permit an award of attorneys’ fees in tort under § 1021 of the California Code of Civil Procedure. (See Xuereb v. Marcus & Millichap, Inc., 3 Cal.App.4th 1338, 1341-1343 (1992); Palmer v. Shawback, 17 Cal.App.4th 296 (1993); Lerner v. Ward, 13 Cal.App.4th 155 (1993) and Wilshire Blvd. Bldg. v. W.R. Grace & Co., 990 F.2d 487 (9th Cir. 1993).)
Take advantage of the limitations afforded by § 1717 and draft the attorney’s fee clause to clearly state that it applies only to actions to “enforce the contract” for “breach of contract” or “default” under the contract.
Give Your Client a Unilateral Right to Attorney’s Fees
Although § 1717 operates to transform a unilateral attorney’s fees clause into “reciprocal” right on contract claims, unilateral fee clauses still retain utility in tort. Moallem v. Coldwell Banker Commercial Group, 25 Cal.App.4th 1827 (1994), confirms that the “reciprocity” afforded by § 1717 applies in contract only, and it breathes life into unilateral fee clauses. Plaintiff Moallem was the assignee of an owner who had entered into a brokerage agreement with Coldwell Banker. Coldwell successfully defended against plaintiff’s breach of contract claim arising out of the owner’s forfeiture of a warehouse property. But Coldwell had sublet the property in violation of the owner’s lease. The trial court entered judgment against Coldwell in plaintiff’s favor on his negligence and breach of fiduciary duty causes of action.
The brokerage agreement between Coldwell and the owner contained a unilateral attorney’s fees clause in Coldwell’s favor that provided: “If broker is required to institute legal action against owner relating to this schedule or any agreement of which it is a part, broker shall be entitled to reasonable attorneys’ fees and costs.” Both parties moved for attorneys’ fees under Civ. Code § 1717. The trial court determined that there was no “prevailing party on the contract” and denied both parties’ requests for attorney’s fees. Coldwell appealed.
On appeal, the court acknowledged Moallem’s position that the term “relating to” in the fee clause was broad enough to include his tort causes of action under Xuereb, supra, and its progeny. However, because the fee clause was unilateral and named Coldwell as the recipient, rather than the “prevailing party,” the court held that only Coldwell was entitled to recover attorneys’ fees, as no reciprocal right was afforded to plaintiff on the tort causes of action. The outcome would have been different had Coldwell not been unilaterally designated as the party to recover attorney’s fees.
Whenever your client has the opportunity to leverage a unilateral fee clause, it can provide added protection against an opponent’s ability to recover attorney’s fees in tort.
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