by John McGill
There is nothing so disappointing, and annoying, as losing a lawsuit. The aggravation and distraction that lawsuits involve and the time that they consume are extraordinary and are not to be underestimated when and if you are considering suing someone. If you are dragged into one it is all the more an imposition and losing at trial is almost the icing on the cake. There is one thing more that will really put you over the edge- when you have to pay the other side’s attorney fees. If you think losing is bad, paying the other party’s attorney for all of the aggravation they have caused you will really put a damper on your enthusiasm.
In this country we have the American Rule: each party to a lawsuit pays its own attorney fees and costs. This though is sometimes, oftentimes, changed by contract. Instead of each party bearing its own costs and fees, it is agreed in the contract that the prevailing party in any dispute will be entitled to recover their fees and costs. In this writer’s opinion, if you have an attorney fees provision in your contract, or if you agree to an attorney fees provision in a contract, you are just asking for problems. Take them out or cross them out, but do NOT agree to them.
Why?
Well, for one thing, attorneys love attorney fees provisions, and if attorneys love them, you know they can’t be good. If the case is marginal, that is, the facts could go one way or the other, the case is more attractive to the attorney. The risk of having to pay fees if you lose is a threat that each side makes against the other, and one of them will be wrong. Likewise, if you, the contractor, want to try and settle the case, and there is a fee provision in the agreement, you will likely find that the cost of settling will go up the longer the case drags on. The other side is not likely to want to settle for a percentage of the actual amount at issue if they have been litigating the case for awhile. Fees go up proportionately, sometimes disproportionately, to the time it takes the case to get to a point where you can actually start negotiations to resolve the dispute. And of course, if one side has more money than the other, or the facts are such that one side has a more favorable position than the other, then the fee provision can really become a hammer that is used to drive a settlement that might otherwise be more reasonable and fair.
Fee provisions can be introduced into litigation in some unintended and unexpected ways too. In the case of Barnhart v CMC Fabrications Inc., the subcontractor CMC bid a project for Barnhart the General. After the bid was in, and after Barnhart relied on the bid when it submitted its price to the owner, CMC and Barnhart got into a dispute and CMC refused to sign the subcontract. Barnhart had to find another contractor, spent more money on the replacement contractor, and then sued CMC to recover that amount. Barnhart alleged two causes of action: promissory estoppel and breach of contract.
Promissory estoppel is based on an equitable theory of recovery that basically says- I reasonably relied on your bid to my detriment and so you owe me the difference (damages) that I incurred in getting somebody else to do the job. Barnhart won on this issue, but they lost on the breach of contract.
The breach of contract claim alleged that CMC’s bid was an offer to perform work. Barnhart accepted that offer when it used the CMC bid. Therefore, a contract was formed and because CMC did not perform, they breached and Barnhart was entitled to damages. The interesting and unfortunate part of the case for Barnhart was that the CMC bid contained an attorney fees provision in it. The court found that, because Barnhart alleged it had a contract with CMC, the fee provision was activated. When the trial court found that there was no contract formed though, CMC was deemed the prevailing party on that cause of action because without a contract there could be no breach. Therefore CMC was entitled to attorney fees, and not just attorney fees for the underlying litigation, but for the appeal as well.
You are probably thinking- “Wait a minute, if there was no contract then how can the fee provision be effective to allow one side to recover fees against the other?” A fair question and one whose answer really stretches logic. According to the appellate court, because Barnhart would have been entitled to recover fees if it prevailed on the breach of contract claim, then CMC could recover if Barnhart did not prevail. It is an odd logic that leads to this conclusion- the fact that a provision in a document, which is not effective at all as a contract, could still have a provision that would be triggered in any event, seems a bit odd.
But as Eddie kept asking Steve and Slim in To Have And Have Not- “Was you ever bit by a dead bee?” In this case, the answer was yes! So be careful with your pleadings and be careful with attorney fees provisions- they can bite you when you least expect it. Take them out of your agreements; there are any number of other ways fees can be awarded without putting a provision in your agreements that guarantees them.
Bio: John McGill is the author of California Contractor’s DESKTOP GENERAL COUNSEL What You Need To Know About California Construction Law (M3-Publisher; www.M3-Publisher.com). He represents contractors in contract, claims, Stop Notice, Liens, employment and other litigation and transactional matters. Contact: jmcgill@archernorris.com or johnpmcgill@sbcglobsal.net ; office - 925-952 5403; cell- 707-337-1932
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