Considering a Recovery of Attorneys’ Fees

When Considering a Recovery of Attorneys’ Fees, The Contract Language Tells All
By Jonathan Pink

Your So Called Life

Your client has been sued for more money than you’ll earn in thirty years of practice. After you recover from your depression over this simple fact, you pour three years of your life into defending the case-from-hell. You work hard. You rack up enough fees to support a small African village for decades.

Two weeks worth of a jury trial, and it’s over. The good news is . . . you won!

Now for the tough part. Your client was sued for breach of contract (and a slew of semi-related torts: fraud, intentional interference, unfair business practices, take your pick), and the contract had an attorneys' fees clause.

As the victor, you seek a recovery of your fees. Will you get them?

The Legal Framework

A. California Civil Code § 1717 – The Basics

California Civil Code § 1717 provides that the prevailing party in an action on a contract may recover its attorneys' fees. Subdivision (a) provides: “In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded ... to the prevailing party, then the party who is determined to be the party prevailing on the contract ... shall be entitled to reasonable attorney's fees in addition to other costs.”

Thus, when one party obtains a simple, unqualified victory by completely prevailing on or defeating all contract claims, and the contract contains a provision for attorney fees, the successful party is entitled to recover reasonable attorney fees incurred in prosecution or defense of those claims. Jackson v. Homeowners Association Monte Vista Estates-East (2001) 93 Cal.App.4th 773, 789. Where neither party achieves a complete victory on all the contract claims, it is within the discretion of the trial court to determine which party – if either – “prevailed on the contract.” Scott Co. of California v. Blount, Inc., 20 Cal.4th 1103, 1109 (1999) (rehearing denied, 107 Cal.App.4th 197)

In your case, the court finds that your client was the “prevailing party” on the contract, and the contract contained an attorneys fees clause which provides that the “prevailing party” in any action “to enforce any rights arising out of or relating to this Agreement shall be entitled to recover its reasonable attorney’s fees.”

Ka-ching!

Your client is entitled to recover its attorneys’ fees on the breach of contract claim pursuant to Cal. Civ. Code § 1717.

Now, not to be greedy, but your client spent hundreds of thousands of dollars defending against the other, non-contract claims. And neither you nor your client wants to leave that money on table. So can you get it?

That depends on just how perspicacious the author of the agreement was when drafting it. You see, attorneys’ fees provisions are not all created equally. This is a point to remember when seeking a recovery under a fees clause – and the next time you’re drafting one.

B. Going for Gold -- Beyond Section 1717

1. “Arising out of . . .”

An attorneys’ fees provision that is applicable to “any dispute under the agreement,” may be sufficiently broad to permit a recovery of fees associated with the defense of claims for, among other things, fraud and breach of fiduciary duty. See, Gil v. Mansano, 121 Cal.App.4th 739, 743 (2004).

In Gil, two individuals purchased a third individual's share of a business venture. In connection with this transaction, all three entered into a written purchase agreement and a separate written release. Id. at 741. The release included an attorneys' fee provision which stated: “In the event action is brought to enforce the terms of this [Release], the prevailing party shall be paid his reasonable attorney [ ] fees and costs incurred therein.” Id. at 742. When the deal went sour, plaintiff sued one defendant for the tort of fraud. Id. The trial court entered summary judgment in favor of the defendant, and awarded him attorney fees pursuant to the fee provision in the release. Id.

On appeal, the court held that the fee provision at issue was too narrow to permit a recovery for fees incurred when defending against the tort of fraud. It held that the fees provision did not encompass the tort claim as it expressly applied only to actions “brought to enforce the terms” of the contract. Id. at 742. The court reasoned that “[i]n this case, the attorney fee provision in the release is very narrowly drawn. It required action brought to enforce the terms of the release. Plaintiff did not bring an action on the release; he sued in tort for fraud.” Id. at 745. However, the court noted that a broader fees provision might have allowed such a recovery, such as if it “had been made applicable to any action . . . involving the release” instead of “only where action was brought to enforce the release.” Id.

Unlike the fee provision in Gil which limited a recovery to an action brought to “enforce the terms of” the provision in your case contains the “arising out of or relating to” language that is given extremely broad interpretation under California law. See, e.g. Santisas v. Goodin, 17 Cal.4th 599, 607-8 (attorney fee clause for all claims “arising out of the execution of th[e] agreement or the sale” was broad enough to embrace both tort and breach of contract claims).

In Santisas , the defendants sought an award of fees pursuant to a fee provision in a real estate purchase agreement. That agreement provided: “‘In the event legal action is instituted by . . . any party to this agreement, or arising out of the execution of this agreement . . . the prevailing party shall be entitled to receive from the other party a reasonable attorney fee to be determined by the court. . . .’” Santisas v. Goodin, supra, 17 Cal.4th at p. 607 (emphasis added). The court held that this language “embraces all claims, both tort and breach of contract, in plaintiffs' complaint, because all are claims ‘arising out of the execution of th[e] agreement or the sale.” Id. at p. 608 (citing to Lerner v. Ward, 13 Cal.App.4th 155,160-61 (1993); emphasis added). The court reasoned that “[i]f a contractual attorney fee provision is phrased broadly enough, as this one is , it may support an award of attorney fees to the prevailing party in an action alleging both contract and tort claims” Id. (citing to Xuereb v. Marcus & Millichap, Inc., 3 Cal.App.4th 1338, 1341 (1992)).

Xuereb v. Marcus & Millichap, supra , also involved an agreement that provided for the recovery of fees if “this Agreement gives rise to a lawsuit or other legal proceeding . . . .” 3 Cal.App.4th at.1340. The Court of Appeal held that the “gives rise to” language “must be interpreted expansively, to encompass acts and omissions occurring in connection with the [agreement] and the entire transaction of which it was the written memorandum.” Id. at 1344. The court reasoned that defendants were entitled to recover fees incurred defending both contract and tort claims because those causes of action “must be said to have arisen from the [agreement] . . . they arose from the underlying transactional relationship between the parties.” Id. (citations omitted.)

In Lerner v. Ward, supra, the parties’ agreement provided that attorney fees were recoverable by “the prevailing party ‘[i]n any action or proceeding arising out of this agreement. . . . ’” Lerner, supra, 13 Cal.App.4th at 158-159. The prevailing defendants urged the court to construe the phrase “arising out of this agreement” broadly, thus permitting a recovery of fees incurred defending against plaintiff’s contract and tort claims. Id. at 160. Relying on Xuereb, the court agreed, holding that the “arising out of” language was entitled to broad interpretation. It ruled that the fees provision “was not limited merely to an action on the contract, but to any action or proceeding arising out of the agreement.” Id. As in Xuereb, the court reasoned that the “tort cause of action arose out of the written agreement.”

The “arising out of” language in your client’s agreement is nearly identical to the expansive language at issue in Santisas, Xuereb, and Lerner. Given this, you are cautiously optimistic that the same result should apply to your client, provided the non-contractual fees you seek can all be traced to your client’s alleged breach of contract.

Oh please, what are the chances of that?

OK, just to keep your blood pressure down, let’s assume that the president of the plaintiff corporation in your case has said in a sworn declaration that “[t]he duties and obligations contained in the Agreement, and the breach thereof, represent the essential events which give rise to the claims raised in this action.” Does that help? Yes, but it’s not the last word.

2. “Or Relating to . . .”

You are truly blessed. The drafter of the agreement in your case included the words “or relating to.” (SFX: Chorus of angles singing.) These three words, beautiful and simple, are almost as good as “Make my day.”

Blacks Law Dictionary defines the term “related” as "Standing in relation; connected; allied; akin." Blacks Law Dictionary 1288 (6th ed.1990).

A clause that includes “relating to” is broader than one that covers only claims “arising out” of a contract. See Mediterranean Enter., Inc. v. Ssangyong Corp., 708 F.2d 1458, 1464 (9th Cir.1983) (arbitration clauses using the phrase “arising out of or relating to” are intended to cover a much broader scope than clauses containing only the “arising out of” language) (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 398, 87 S.Ct. 1801, 18 L.Ed. 1270 (1967) (noting that “arising out of or relating to this agreement” had been labeled a “broad arbitration clause”)).

In Mediterranean, the parties entered into a written agreement to form a joint venture. The agreement contained an arbitration clause which provided: “Any disputes arising hereunder . . . shall be settled through binding arbitration . . . .” 708 F.2d at 1461. After the relationship soured, plaintiff filed suit alleging breach of contract and various torts claims, and moved to compel arbitration. The defendant opposed, arguing that the “arising hereunder” language was not designed to cover arbitration of any dispute between parties, but rather only those relating to interpretation and performance of contract itself. Id. at 1463.

The appellate court agreed, finding that “when an arbitration clause ‘refers to disputes or controversies ‘under’ or ‘arising out of’ the contract,’ [the] arbitration is restricted to ‘disputes and controversies relating to the interpretation of the contract and matters of performance.’” Id. at 1464 (citing In re Kinoshita & Co., 287 F.2d 951, 953 (2d Cir.1961)). Relying on Kinoshita, the court held that “the phrase ‘arising under’ is narrower in scope than the phrase ‘arising out of or relating to.’” Id. The court reasoned that there is a “significant” difference between broad arbitration clauses, which direct to arbitration disputes “arising out of or relating to [an] agreement,” and clauses limited to disputes or controversies “under” or “arising out of” the contract. Id. at 1464. The court found that the latter type of clause “is intended to cover a much narrower scope of disputes.” Id.

You’re into the home stretch. Here, your attorneys fees clause provides for a recovery of fees “arising out of or relating to” the contract on which you kicked butt. As in Mediterranean, this clause is much broader than one containing only the “arising out of” language. Even if the “arising out of” language was not expansive enough, the “arising out of or relating to ” language covers fees incurred defending against plaintiff’s tort and contract claims.

Thus, your fees provision, with its extremely broad “relating to” language permits your to recover fees incurred defending against all the claims asserted by plaintiff that are “connected; allied; akin” or stand in some relation to the contract.

Not bad. Thanks to the thoughtful drafting of the attorney who prepared the contract long, long ago in an office far, far away, you – and your client – now really have something to celebrate.

Closing Up For the Night

The take-away from all of this is that a broadly phrased contractual attorneys fees provision can support an award to the prevailing party in a tort action.

The court will interpret the intent and scope of the agreement by focusing on the usual and ordinary meaning of the language used. See Civ. Code, § 1644; see also Lloyd's Underwriters v. Craig & Rush, Inc., 26 Cal.App.4th 1194, 1197-1198 (1994). In other words, clearly state everything you intend to cover in the fees provision. Just because the fees provision says “arising out of” does not mean it also covers matters “relating to” the agreement, unless you say so.

If your intent is to permit a recovery of fees incurred in the entire lawsuit, make the fees provision broad enough to support such a recovery. Now that’s winning.


Jonathan Pink is co-Vice Chair of the Intellectual Property Group at Lewis Brisbois Bisgaard & Smith, LLP. He is resident in the firm’s Orange County office and can be reached at pink@lbbslaw.com or 714-668-5589