In breach of contract lawsuits, one of the most dangerous provisions that a contract can have is an attorney’s fee provision. This is a provision that provides that in the event of litigation concerning disputes on the contract between its parties, the loser in the litigation must pay the attorney’s fees of the winner. The ordinary rule in California as in most states is that if there is a breach of contract lawsuit, regardless of which party wins, each party bears its own attorney’s fees. This rule is so pervasive among the states that it is commonly referred to as the “American Rule.” (In Britain and most Commonwealth countries, the “British Rule” provides that the loser does pay the winner’s attorney’s fees.) California law allows the parties to change this default rule by specifically providing otherwise in the contract: an “attorney’s fees provision.” The authority for awarding attorney’s fees to the prevailing party in a breach of contract case in California is primarily governed by California Civil Code Section 1717. This statute provides that when a contract includes a provision for attorney’s fees, the prevailing party in an action to enforce the contract is entitled to recover reasonable attorney’s fees as a matter of right. Significantly, the statute ensures reciprocity, meaning that even if the contract specifies only one party as entitled to fees, the prevailing party—whether specified in the contract or not—may recover fees. [Cal. Civ. Code Section 1717; Hsu v. Abbara (1995) 9 Cal. 4th 863, 865]. In the event that neither side wins an unqualified victory the trial court may determine which side is actually the “prevailing party” i.e. whether one party prevailed or whether neither party prevailed sufficiently to justify an award of fees. [Blue Mountain Enterprises LLC v. Owen (2022) 74 Cal. App. 5th 537, 558].
The most important thing to know about an attorney’s fee provision in a contract is that this is an exceptional and very important provision. By agreeing to the fee provision the parties are opting out of the default rule that the parties pay their own fees regardless of who wins in a future breach of contract lawsuit (the “American Rule”). Too often parties see this provision when reviewing and analyzing the contract and they assume that it is merely “legal boilerplate” that has to be there. Not at all. The opposite is the case. The decision to agree to a fee provision is strategic. In some contracts it may be the case that the risks entailed in the contract make breach of contract much more likely for one party versus the other. This is very common. In such a case, the party exposed to the greater risk will do well to think twice, three times, before agreeing to an attorney’s fee provision. The fee provision is an exception to the rule and should be viewed and negotiated as such.
Attorney’s fee provisions can act as a dangerous “poison pill” provision. In even a fairly high-dollar contract if the matter results in a breach of contract lawsuit the question of paying the other side’s attorney’s fees can quickly become prohibitive for one, or even both sides. Sometimes the attorney’s fees claims are larger than the nominal claim being brought in the lawsuit. Worse, many attorneys are dishonest about the fees that they claim when they win lawsuits containing a fee provision. There; I said it. Sometimes the winners of such lawsuits will claim attorney’s fees that are all out of proportion to what was actually at stake in the breach of contract lawsuit. Such claims are unbelievable, and I do not believe them. And don’t count on the judge to reduce the claimed fees to a reasonable level. Some judges do. Most judges do not. Or they reduce it by some amount but the amount remains absurd. In our opinion this is one of the moral failings of the judicial system as well as the legal profession. There appears to be no reform of this unfortunate situation in prospect.
The conclusion that the reader should draw from this is that an attorney’s fee provision can completely change the dynamics of a breach of contract lawsuit. Never agree to sign a contract that contains such a provision without careful thought and consideration In some circumstances a fee provision can be operate in a positive way. Sometimes the risks of taking a case to trial are so great for both sides (neither side daring to risk being liable for the other side’s fees) that this encourages compromise and settlement. Settlement is usually a good thing. Sometimes settlement is best for both sides.
If you are involved in a breach of contract lawsuit, Buffington Law Firm’s breach of contract attorneys offer a free legal consultation to discuss the matter. All consultations are with an experienced breach of contract trial attorney and are completely confidential and protected by the attorney-client privilege. And there is never any obligation.