California Supreme Court adds to line of cases narrowly applying the right to recover attorneys’ fees under Civil Code section 1717.

Despite increasing sophistication amongst contracting parties and evermore common use of attorney fee clauses, the “American Rule” endures.  The American Rule is that each side pays its own attorney fees in litigation, win or lose.  In California, statutory exceptions to the American Rule are limited, leaving private parties to modify the American Rule, if they so desire, through contract.  For those contracting parties, the recent California Supreme Court decision in, LLC v., however, should temper expectations when seeking to recover attorneys’ fees under California Civil Code section 1717.

A long-standing criticism of the American Rule is that it encourages meritless lawsuits.  The American Rule creates somewhat of a Sophie’s choice for defendants to baseless actions: pay to settle a frivolous claim or potentially pay more in attorneys’ fees to defeat bogus claims.

In the absence of legislative will to abandon or modify the American Rule, private parties turned to contractual attorney fee provisions to discourage weak or baseless lawsuits between contracting parties.  Many early adopters, however, also used attorney fee provisions to discourage lawsuits based on good faith disputes.  For example, residential landlords began including one-sided provisions in leases, making the tenant liable for the landlord’s attorneys’ fees in any lawsuit related to the lease.

The Legislature responded by enacting section 1717, which generally entitles the prevailing party in any action on a contract to recover its attorneys’ fees where the contract contains an attorney fee clause, regardless of whether the clause is one-sided.  The case law interpreting and applying section 1717 shows time and again that section 1717 is a limited exception to the American Rule.  The principal effect of section 1717 is to protect weaker or unsophisticated contracting parties by nullifying the one-sidedness of attorney fee clauses.  Otherwise, courts will not construe a narrow attorney fee clause more broadly than the language used in the contract, much to the chagrin of many prevailing parties.

For example, section 1717 does not apply where the plaintiff asserts tort claims, even if the defendant prevails based on a provision in the contract.  Although “a defense to a tort action based on a provision in the contract may have the effect of enforcing the provisions of the contract[,]” “the assertion of a defense does not constitute the bringing of an action to accomplish that goal.”  Gil v. Mansano (2004) 121 Cal.App.4th 739, 743.  Broadly-phrased contractual language (i.e., “all claims between the parties, whether in tort or contract”), might entitle the defendant to recover its attorneys’ fees in that instance, but section 1717 will not imply the right where the action is not based on the contract.

In (2017) 2 Cal.5th 968, the Court addressed a different limiting aspect of section 1717: when has a party “prevailed” such that section 1717 requires the court to award attorneys’ fees?  There, DisputeSuite sued Score, in California, for breach of contract.  The contract contained an attorney fee provision as well as a forum selection clause.  Score successfully moved to dismiss the action based on a forum selection clause in the agreement that specified Florida as the proper forum.  Score then moved to recover its attorneys’ fees as the prevailing party.  The trial court denied the motion because, although the action in California was dismissed, DisputeSuite had filed suit in Florida, so it remained an open question whether Score would ultimately prevail on the merits of the contract claims.  The Court of Appeals and the California Supreme Court affirmed the trial court’s ruling.

Score argued that a party could be a prevailing party, under section 1717, based on a procedural victory.  Supreme Court agreed, but held that a procedural victory must “finally dispose of the parties’ contractual dispute” to merit a prevailing party award under section 1717.  Score’s motion to dismiss did not finally dispose of the dispute.  As some consolation, the Court indicated that a party in Score’s position, having been sued in the wrong forum, was not wholly without recourse.  Such a “defendant may seek sanctions under Code of Civil Procedure section 128.7, which may include attorney fees incurred as a result of the improper filing.”  2 Cal.5th at 981.  Section 128.7 has its own shortcomings, however, which are not addressed here.

The DisputeSuite decision builds on a line of cases demonstrating the limited relief Civil Code section 1717 affords.  Parties negotiating a contract should be attentive to the language used in any attorney fee clause, to ensure its scope meets their expectations.  Otherwise, they should expect to bear their own legal expenses, win or lose.  At least for now, that’s the American way.