Abbey v. Fortune Drive Assocs. CA1/1 ( 2013 )

Filed 7/29/13 Abbey v. Fortune Drive Assocs. CA1/1
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION ONE
BRANDON ABBEY,
Plaintiff and Respondent,
A135062
v.
FORTUNE DRIVE ASSOCIATES, LLC, (San Mateo County
Super. Ct. Nos. CIV 479539,
Defendant and Appellant. CIV 480548)
Plaintiff Brandon Abbey filed two lawsuits against defendant Fortune Drive
Associates, LLC (Fortune). The first lawsuit sought damages in connection with Abbey‘s
business dealings with Fortune. The second sought to enjoin an arbitration commenced
by Fortune regarding similar issues. The trial court granted the requested relief in the
second lawsuit, staying the arbitration. Following entry of a declaratory judgment for
Abbey in the second lawsuit, and before the conclusion of the first lawsuit, Abbey was
awarded attorney fees under Civil Code section 1717 (section 1717). Fortune contends
the trial court erred in awarding attorney fees, arguing such an award is available only to
the prevailing party in the underlying contractual dispute. We agree and reverse the
award.
I. BACKGROUND
In August 2008, Abbey filed a lawsuit in San Francisco Superior Court (the merits
lawsuit) against Fortune and others (together, defendants) in connection with his
involuntary termination from involvement in the business activities of Fortune. Because
of an upheaval in the law practice of Abbey‘s attorney, he did not immediately serve the
complaint. In October 2008, the attorney finally notified counsel for defendants of the
filing of the merits lawsuit, but he told counsel the complaint would not be served until
his professional situation improved. Rather than await service of the merits lawsuit,
Fortune promptly served a demand for arbitration of the dispute and commenced
proceedings with the American Arbitration Association (AAA).
Fortune‘s claim of a right to arbitrate was based on an amendment to Fortune‘s
operating agreement (the Third Amendment), which provided that all disputes regarding
Abbey‘s termination from Fortune would be resolved by AAA arbitration. The same
provision contained an attorney fees clause stating: ―The arbitrator may also assess
reasonable attorneys‘ fees and expenses and the fees and expenses of appraisers or other
experts, in amounts the arbitrator determines are equitable, as well as all other costs of
arbitration or any ensuing litigation, against a party to the action if the arbitrator
determines that such party acted arbitrarily, vexatiously, not in good faith and/or
unreasonably.‖
As Fortune pressed ahead with preparations for the arbitration, Abbey‘s attorney
caused the merits lawsuit to be served on defendants in early December 2008.
Defendants objected to the lawsuit‘s venue in San Francisco and raised concerns about
the manner of service, but they offered to accept service if venue was changed to San
Mateo County. Around the same time, the arbitrator scheduled commencement of the
arbitration for April 2009.
Concerned about the progress of the arbitration proceedings, to which Abbey
objected, and worried the merits lawsuit could not be transferred to San Mateo County in
time to stop the arbitration, Abbey‘s attorney filed a lawsuit against Fortune in San Mateo
County on December 19, 2008 (the declaratory relief lawsuit).1 The declaratory relief
lawsuit contained no causes of action based on Abbey‘s business dealings with Fortune,
1
The declaratory relief lawsuit was filed only against Fortune, perhaps because
Fortune was the only listed claimant in the demand for arbitration.
2
seeking only a stay of the arbitration and a declaration that Abbey was not bound by the
arbitration provision of the Third Amendment. In a February 2009 ruling in the
declaratory relief lawsuit, the trial court stayed the arbitration. We affirmed that ruling,
finding the arbitration clause in the Third Amendment to be unenforceable against
Abbey. (Abbey v. Fortune Drive Associates, LLC (Apr. 20, 2010, A124684) [nonpub.
opn.] (Abbey I).)
In the meantime, the merits lawsuit had been transferred to San Mateo County,
arriving in January 2009. Following the trial court‘s entry of a stay of arbitration in the
declaratory relief lawsuit, defendants filed a petition to compel arbitration in the merits
lawsuit. Consistent with its ruling in the declaratory relief lawsuit, the trial court denied
the petition to compel arbitration. Defendants also appealed this ruling, and our decision
in Abbey I disposed of both appeals.
In February 2011, judgment was entered in the declaratory relief lawsuit.2 In
March, Abbey filed a memorandum of costs, followed in April by a motion for attorney
fees under section 1717. In an order of June 20, 2011, the law and motion judge denied
Abbey‘s attorney fees motion without prejudice and directed Abbey to file the motion
before the complex case judge to whom the merits lawsuit had been assigned. In the
same order, the law and motion judge consolidated the declaratory relief lawsuit and the
merits lawsuit ―[o]n the court‘s own motion.‖
Abbey refiled the attorney fees motion as directed on October 20, 2011, seeking
all fees incurred in connection with his challenge to the arbitration, including his response
to the petition to compel arbitration in the merits lawsuit. In an order containing detailed
findings of fact and law, the trial court granted the motion as to the attorney fees incurred
in connection with proceedings in the declaratory relief lawsuit and the Abbey I appeal,
2
We have not located a copy of this judgment in the appellate record, but the
docket sheet from the declaratory relief lawsuit notes the entry of a judgment on
February 8, 2011, followed a week later by the filing of a ―Notice of Entry of Declaratory
Judgment‖ by Abbey. According to the trial court‘s ruling on attorney fees, the parties
stipulated to entry of a judgment declaring there is no enforceable agreement to arbitrate.
3
but it denied the motion as to fees incurred in the merits lawsuit, which had not been
concluded. The court found unenforceable the language in the Third Amendment
permitting an award of fees only if the opposing party‘s conduct was found to be
unreasonable, holding: ―The operative basis for awarding attorneys‘ fees herein is
Section 1717, not the particular language of the unenforceable arbitration clause.‖
II. DISCUSSION
Fortune contends attorney fees could be awarded under the Third Amendment
only to the prevailing party in the merits lawsuit and could not be awarded without a
finding of unreasonable conduct. When, as here, a party‘s entitlement to attorney fees
― ‗amounts to statutory construction and a question of law,‘ ‖ we review the trial court‘s
decision de novo. (Connerly v. State Personnel Bd. (2006) 37 Cal.4th 1169, 1175.)
A. Single Prevailing Party
Section 1717 states, in relevant part: ―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 either to one of the parties or to the prevailing party, then
the party who is determined to be the party prevailing on the contract, whether he or she
is the party specified in the contract or not, shall be entitled to reasonable attorney‘s fees
in addition to other costs. [¶] . . . [¶] Reasonable attorney‘s fees shall be fixed by the
court, and shall be an element of the costs of suit.‖ (Id., subd. (a).)
A primary purpose of section 1717 is to ensure mutuality of remedy under
contractual attorney fees provisions. (Santisas v. Goodin (1998) 17 Cal.4th 599, 611
(Santisas).) As the Supreme Court explained in Santisas, in language directly applicable
to Abbey‘s motion: ―The second situation in which section 1717 makes an otherwise
unilateral right reciprocal, thereby ensuring mutuality of remedy, is when a person sued
on a contract containing a provision for attorney fees to the prevailing party defends the
litigation ‗by successfully arguing the inapplicability, invalidity, unenforceability, or
nonexistence of the same contract.‘ [Citation.] Because these arguments are inconsistent
with a contractual claim for attorney fees under the same agreement, a party prevailing on
any of these bases usually cannot claim attorney fees as a contractual right. If
4
section 1717 did not apply in this situation, the right to attorney fees would be effectively
unilateral . . . because only the party seeking to affirm and enforce the agreement could
invoke its attorney fee provision. To ensure mutuality of remedy in this situation, it has
been consistently held that when a party litigant prevails in an action on a contract by
establishing that the contract is invalid, inapplicable, unenforceable, or nonexistent,
section 1717 permits that party‘s recovery of attorney fees whenever the opposing parties
would have been entitled to attorney fees under the contract had they prevailed.‖ (Id. at
p. 611.) Accordingly, while Abbey might have no contractual right to recover attorney
fees under the Third Amendment, since the arbitration provision containing the attorney
fees clause has been held unenforceable as to him, he has a statutory right to attorney fees
under section 1717, which arises as a result of the contractual provision. Fortune does
not contend otherwise.3
Although Fortune does not contest Abbey‘s right to invoke section 1717 despite
the invalidity of the arbitration clause containing the attorney fees provision, it contends
this case should be governed by the general rule that ―there may be only one prevailing
party entitled to attorney fees on a given contract in a given lawsuit.‖ (Frog Creek
Partners, LLC v. Vance Brown, Inc. (2012) 206 Cal.App.4th 515, 535, fn. 14 (Frog
Creek).) Under this rule, Fortune argues, the prevailing party entitled to attorney fees
must be determined by the outcome of the merits lawsuit. Abbey argues he is entitled to
attorney fees without regard to the merits lawsuit because the validity of the arbitration
clause was litigated and resolved in a different, discrete lawsuit.
There are three leading decisions in this area. The earliest, Otay River
Constructors v. San Diego Expressway (2008) 158 Cal.App.4th 796 (Otay), featured a
construction dispute and three contracts, only two of which contained an arbitration
3
More generally, although the right to attorney fees under section 1717 is
triggered by the presence of a contractual provision, such attorney fees are regarded as
awarded pursuant to section 1717, rather than the contract. (See Walker v. Ticor Title Co.
of California (2012) 204 Cal.App.4th 363, 372 (Walker) [―Following the amendment of
section 1717 [in 1981], ‗ ―attorney‘s fees were to be seen as allowed by statute, rather
than by contract.‖ ‘ ‖].)
5
clause. (Id. at p. 800.) The plaintiff commenced an arbitration proceeding, contending
the dispute arose under one of the contracts authorizing arbitration. When the defendant
declined to arbitrate, the plaintiff filed a petition to compel arbitration in superior court.
(Ibid.) The trial court denied the petition, concluding the dispute arose under the contract
that did not require arbitration. When the defendant sought attorney fees as the
prevailing party in the plaintiff‘s unsuccessful petition to compel, the trial court denied
the motion on the ground the defendant had not prevailed in the ―contemplated‖ litigation
on the merits of the contract claims. (Id. at p. 801.)
The Court of Appeal reversed. It began with the language of section 1717, which,
the court noted, ―governs awards of attorney fees based upon a contract and authorizes an
award of attorney fees to a prevailing party ‗[i]n any action on a contract‘ ‗to enforce
that contract‘ if the contract provides for an award of attorney fees.‖ (Otay, supra,
158 Cal.App.4th at p. 806.) The court reasoned that a petition to compel arbitration is an
― ‗action on the contract‘ ‖ for purposes of section 1717 and the defendant was the
prevailing party in that action, thereby entitling the defendant to an award of fees. (Otay,
at p. 807.) Rejecting the plaintiff‘s characterization of the result as merely ―an interim
procedural victory,‖ the court held that the order denying arbitration was ―an appealable
order or judgment in a discrete legal proceeding even though the underlying litigation on
the merits was not final.‖ (Ibid.) It distinguished the cases on which the plaintiff relied
as not ―involv[ing] the final resolution of a discrete legal proceeding‖ (ibid.), concluding
―the merits of the contract claims under the [contract] that [the plaintiff] sought to send to
arbitration were not at issue in the court proceedings to compel arbitration and the fact
that the parties will probably pursue these claims in another action does not lessen [the
defendant‘s] victory in this discrete legal proceeding.‖ (Id. at p. 808.)
The second decision, Turner v. Schultz (2009) 175 Cal.App.4th 974 (Turner),
applied the principle announced in Otay in circumstances similar to those presented here.
Like Abbey, the plaintiff in Turner was terminated from his employment with a company
in which he was an investor. When he expressed dissatisfaction with the formula for
repurchasing his investment, the company and its officers demanded AAA arbitration of
6
the dispute pursuant to a clause in the pertinent contract. (Id. at p. 977.) The plaintiff
declined to participate, contending the agreement had been fraudulently induced, and
filed a breach of contract action in Contra Costa County. When the AAA pressed ahead
with preparations for the arbitration, the plaintiff filed a separate action in San Francisco
Superior Court against the defendants and the AAA, seeking an injunction against further
proceedings and a declaration the arbitration could not proceed without an order
compelling arbitration. (Id. at pp. 977–978.) The trial court eventually refused the
request for an injunction. In the meantime, the defendants had filed a petition to compel
arbitration in the plaintiff‘s Contra Costa County action, which was granted. They
thereafter successfully moved for judgment on the pleadings in the San Francisco action
and were granted attorney fees under section 1717. (Turner, at pp. 978–979.)
The Court of Appeal affirmed the fees order. The court first rejected the
plaintiff‘s contention the San Francisco action was not an action ― ‗on the contract‘ ‖ for
purposes of section 1717, reasoning a declaratory relief action to avoid enforcement of a
contract is an action on the contract. (Turner, supra, 175 Cal.App.4th at p. 980.) Relying
on Otay and Acosta v. Kerrigan (2007) 150 Cal.App.4th 1124, the court also rejected the
argument the prevailing party could not be determined until conclusion of the pending
lawsuit over the merits of the plaintiff‘s claims, reasoning, ―The fees at issue were
incurred in connection with an independent complaint for declaratory and injunctive
relief. As in Otay, the only issue before the court—whether the arbitration should be
allowed to proceed—was resolved in defendants‘ favor in this discrete legal proceeding.
. . . Irrespective of who becomes the prevailing party in the subsequent arbitration, there
was a prevailing party for purposes of section 1717 in this discrete proceeding on the
contract, and the trial court could properly award attorney fees.‖ (Turner, at pp. 983–
984, fn. omitted.)
Finally and more recently came Frog Creek, supra, 206 Cal.App.4th 515, a
thorough examination of the relevant statutes and case law in this area. The Frog Creek
defendant filed a petition to compel arbitration in the plaintiff‘s action for breach of
contract. The trial court denied the petition when the defendant was unable to produce a
7
version of the contract with an arbitration provision, a decision affirmed on appeal. (Id.
at pp. 521–522.) Following remand, the defendant renewed its petition to compel, having
located another contract. Although the petition was denied in the trial court, the Court of
Appeal reversed and ordered arbitration. (Id. at p. 522.) When the defendant later
prevailed in the arbitration, the arbitrators declined to rule on the parties‘ entitlement to
attorney fees in connection with the legal skirmishing that preceded the arbitration
proceeding. (Ibid.) The parties then filed cross-motions under section 1717 in the trial
court, the defendant seeking all of its pre-arbitration attorney fees and the plaintiff
seeking the fees incurred in connection with its defeat of the initial petition to compel.
The trial court awarded the plaintiff the fees it sought, reasoning it was the prevailing
party on that petition and in the first appeal. (Frog Creek, at p. 523.)
The Court of Appeal reversed the award of attorney fees to the plaintiff, holding
after an extensive analysis that ―the trial court erred in awarding [the plaintiff] attorney
fees under Civil Code section 1717 for prevailing on the first petition to compel
arbitration because [the defendant] prevailed on the contract action overall; the
Legislature did not intend to authorize multiple attorney fees awards to multiple
prevailing parties on a single contract in a given lawsuit.‖ (Frog Creek, supra,
206 Cal.App.4th at p. 546.) In the course of its analysis, Frog Creek discussed and
distinguished both Otay and Turner, concluding that these decisions ―confirm that
attorney fees should be awarded to the party who prevails on a petition to compel
arbitration only when the resolution of that petition terminates the entire ‗action on the
contract.‘ ‖ (Frog Creek, at p. 531.) The court expressed no reservations about the result
in Otay, which Frog Creek characterized as holding, ―when a party defeats an
independent petition to compel arbitration, the action is terminated and the prevailing
party on the petition is entitled to fees under Civil Code section 1717.‖ (Id. at p. 533.)
The court was more equivocal in its discussion of Turner, noting in a footnote: ―Turner
is consistent with our interpretation of Civil Code section 1717: there may be only one
prevailing party entitled to attorney fees on a given contract in a given lawsuit. However,
in light of Turner‘s somewhat unusual procedural posture, in which a pending lawsuit
8
addressed the substantive contractual claims involved in the independent action, we
express no opinion on the court‘s conclusion that a fee award was proper in the
circumstances of that case.‖ (Frog Creek, at p. 535, fn. 14.)
We share Frog Creek‘s concern with permitting an award of fees independent of
the outcome of the underlying contractual litigation when, as here, the underlying
contractual litigation was pending at the time the independent action was filed. While we
do not challenge the correctness of the result in Turner, we conclude the existence of two
separate lawsuits is, standing alone, insufficient to justify abandoning the generally
applicable rule under section 1717 in the circumstances presented here.4 When the
availability of arbitration is litigated in a discrete action only because the party seeking
attorney fees voluntarily elected to file a separate action, rather than raise the issue in a
pending contractual lawsuit, there is no basis for departing from the rule of one prevailing
party.
The general rule that section 1717 permits only one prevailing party per dispute
was established at least as far back as La Pietra v. Freed (1978) 87 Cal.App.3d 1025, in
which the plaintiffs filed an action for breach of a contract containing an arbitration
clause. The defendant, who had already instituted an arbitration proceeding, filed a
successful motion to compel in the plaintiff‘s lawsuit and was awarded attorney fees in
connection with that motion. (Id. at p. 1028.) The Court of Appeal reversed the award of
attorney fees, holding that section 1717, which at that time defined the prevailing party in
an action on a written contract as the ― ‗party in whose favor final judgment is
rendered,‘ ‖ did not permit a separate award of attorney fees to the prevailing party on a
motion to compel arbitration, since the order granting the motion did not constitute a final
judgment. (La Pietra, at pp. 1030–1031.) Although the language in section 1717 has
since been amended, the careful analysis in Frog Creek demonstrates that these changes
4
Fortune has filed a request for judicial notice of the special verdicts rendered in
the trial of the merits lawsuit, which apparently was concluded in December 2012, after
close of the record on appeal. Because we find the outcome of the merits lawsuit to be
irrelevant to our decision, we deny this request.
9
were not intended to change the ―one prevailing party‖ rule. (Frog Creek, supra, 206
Cal.App.4th at pp. 525–531.) Given the Legislature‘s failure over the last 35 years to
overturn the rule announced in La Pietra, despite tinkering with section 1717 in the
interim, we conclude the principle of one prevailing party is legislatively favored.
This conclusion is reinforced by Code of Civil Procedure section 1292.4, which
ensures that, once a lawsuit is filed with respect to a particular contractual dispute, the
availability of arbitration will generally be litigated within that lawsuit. Section 1292.4
states: ―If a controversy referable to arbitration under an alleged agreement is involved in
an action or proceeding pending in a superior court, a petition for an order to arbitrate
shall be filed in such action or proceeding.‖ A party seeking to compel arbitration
therefore must file its petition in the merits lawsuit, if one is already pending. (Phillips v.
Sprint PCS (2012) 209 Cal.App.4th 758, 772.) As a result of section 1292.4, the issue of
arbitration is often required to be resolved in the merits lawsuit, and the ―one prevailing
party‖ rule necessarily precludes a separate award of attorney fees with respect to the
parties‘ litigation over the issue of arbitration.
The present circumstances exist only because, when a party is seeking to defeat,
rather than compel, arbitration, there is no parallel statutory requirement that litigation
over the availability of arbitration occur in a pending merits lawsuit. While there may be
circumstances in which the absence of such a requirement justifies a separate award of
attorney fees to the prevailing party in a proceeding to defeat arbitration, we find no such
justification here.
By the time Abbey filed the declaratory relief lawsuit, his merits lawsuit had been
pending for several months, and the merits lawsuit was served on Fortune only days
before the declaratory relief lawsuit was filed. Because the merits lawsuit concerned the
Third Amendment, which had been drafted by Fortune and contained the arbitration
clause, Abbey could readily have anticipated that Fortune would assert a right to arbitrate
the dispute. Abbey‘s causes of action to defeat arbitration therefore could have been
included in the original complaint of the merits lawsuit. Even if Abbey did not anticipate
the possibility of arbitration at the time the merits lawsuit was filed, his challenge to the
10
arbitration clause could have been asserted by way of an amended complaint in the merits
lawsuit, rather than by separate lawsuit. Finally, even if the exigencies of the moment
made a separate lawsuit convenient, as his attorney avers, the merits lawsuit could have
been consolidated with the declaratory relief lawsuit once the merits lawsuit was
transferred to San Mateo County, prior to resolution of the arbitration issue. The two
lawsuits were, in fact, consolidated sua sponte, although not until after entry of judgment
in the declaratory relief lawsuit. In short, Abbey was not required, whether by law or
circumstances, to resolve the issue of arbitration in a lawsuit separate from the merits
lawsuit. He merely chose to do so.
We find no basis for departing from the general rule of section 1717 merely
because Abbey chose to resolve the issue in that manner. When there is no legal
necessity for resolving the issue in a separate proceeding, the difference between one and
two proceedings is merely one of form and does not justify the imposition of a different
substantive rule regarding the availability of attorney fees. Further, to hold otherwise
would encourage parties to file unnecessary litigation merely to preserve the possibility
of a separate award of attorney fees on litigation of the issue of arbitration, contrary to the
―one prevailing party rule.‖ Accordingly, we hold that where a party elects to file a
separate lawsuit challenging the availability of arbitration at a time when a lawsuit over
the underlying contractual dispute is already pending, the filing party is bound by the
generally applicable ―one prevailing party‖ rule, at least when the filing of an
independent lawsuit was not legally mandated.5
This holding does not conflict with the outcome of either Otay or Turner. In both,
the party awarded attorney fees was not the party responsible for instituting the separate
5
Fortune argues Abbey‘s decision to raise his claim for declaratory relief in a
separate lawsuit from his breach of contract claims constituted ―claim splitting.‖ Because
Fortune did not raise this argument as a plea in abatement of the declaratory relief action,
it may be raised only as a bar to the merits lawsuit, not to challenge the result in the
declaratory relief action. (Mycogen Corp. v. Monsanto Co. (2002) 28 Cal.4th 888, 904.)
Fortune also argues in its reply brief that the attorney fees provision, by its terms, is
inapplicable to this dispute. We find it unnecessary to reach this issue.
11
proceedings. On the contrary, in Turner, the party awarded attorney fees had filed a
petition to compel arbitration in the plaintiff‘s merits lawsuit. It litigated the issue of
arbitration in the separate lawsuit only because the plaintiff had elected to file an action
challenging the availability of arbitration. The prevailing party‘s litigation of the issue in
a separate proceeding was therefore involuntary. In Otay, the initial proceeding over the
merits was commenced as an arbitration. The filing of a separate lawsuit was therefore
legally necessary to permit judicial resolution of the issue of the availability of
arbitration. Again, the use of a separate proceeding was not a voluntary decision of the
party seeking fees. Given these different circumstances, our result is consistent with both
decisions.
B. Unreasonable Conduct
As noted above, the attorney fees provision in the Third Amendment permitted an
award of fees only if ―the arbitrator determines that such party acted arbitrarily,
vexatiously, not in good faith and/or unreasonably.‖ The trial court made no finding of
unreasonable conduct, holding this aspect of the attorney fees clause to be rendered
unenforceable when the arbitration clause itself was found unenforceable. Although our
reversal of the trial court‘s award of attorney fees to Abbey makes it unnecessary for us
to address this issue, we elect to do so because the issue may arise again in connection
with a motion for attorney fees based on the outcome of the merits lawsuit. We agree
with Fortune this language constitutes an enforceable limitation on any award of attorney
fees.
In enacting the present version of section 1717, ―the Legislature intended ‗to
establish uniform treatment of fee recoveries in actions on contracts containing attorney
fee provisions and to eliminate distinctions based on whether recovery was authorized by
statute or by contract.‘ ‖ (Walker, supra, 204 Cal.App.4th 363, 372.) In order to promote
the Legislature‘s objective of standardizing the award of attorney fees under
section 1717, the precise provisions of a contractual attorney fees provision will not
always be enforced. ―[W]hile the availability of an award of contractual attorney fees is
created by the contract [citation], the specific language of the contract does not
12
necessarily govern the award. In setting contractual attorney fees, ‗ ―[e]quitable
considerations [under section 1717] must prevail over . . . the technical rules of
contractual construction.‖ ‘ [Citation.] Parties to a contract cannot, for example, enforce
a definition of ‗prevailing party‘ different from that provided in Civil Code section 1717.
[Citation.] In its most recent statement of the factors to be considered in setting an award
of contractual attorney fees, the Supreme Court noted: ‗Although the terms of the
contract may be considered, they ―do not compel any particular award.‖ ‘ ‖ (Walker, at
pp. 372–373.)
The borders of this principle, as it applies to our circumstances, are defined by two
decisions. In the first, Wong v. Thrifty Corp. (2002) 97 Cal.App.4th 261 (Wong), the
terms of a lease permitted an award of attorney fees in an action to enforce the lease only
if ― ‗it shall be determined that Lessee was in default.‘ ‖ (Id. at p. 263.) The trial court
denied attorney fees to the landlord because he had accepted the lessee‘s statutory
settlement offer, making it unnecessary for the court to render a determination of default.
(Ibid.) Wong held the ―determination of default‖ restriction unenforceable because it (1)
altered the statutory definition of ―prevailing party‖ in actions in which no formal finding
of default was made and (2) defeated the mutuality of the attorney fees provision. (Id. at
pp. 264–265.)
In the second decision, Leamon v. Krajkiewcz (2003) 107 Cal.App.4th 424(Leamon), the court considered a real estate purchase contract that permitted an award of
attorney fees only if the party seeking fees had sought to mediate before filing suit or had
not refused mediation when requested. (Id. at p. 432.) Leamon enforced this clause,
finding it satisfied the mutuality requirement and did not otherwise conflict with the
public policy aims of section 1717. (Leamon, at p. 433.) Leamon distinguished Wong by
characterizing the mediation requirement as a ―condition precedent‖ to the award of
13
attorney fees and holding section 1717 does not forbid such conditions, so long as they do
not conflict with the public policy objectives of the statute.6 (Leamon, at p. 436.)
We conclude the requirement of a finding of unreasonable conduct is closer to the
Leamon condition precedent than to the limitation in Wong because a restriction of the
award to circumstances of unreasonable conduct does not offend the policy objectives of
section 1717. As noted above, section 1717 was intended to introduce an element of
uniformity in the awarding of contractual attorney fees, particularly between fees
awarded under contracts and those authorized by statute. Upon examination, however,
the desired uniformity concerns a restricted range of issues. First, and perhaps most
important, section 1717 standardizes the determination of the prevailing party for
purposes of an award of attorney fees. Accordingly, the statute itself defines the
prevailing party, and that definition supersedes any contrary definition in the contractual
clause. (Id., subd. (b)(1); Santisas, supra, 17 Cal.4th at pp. 615–617.) Second,
section 1717 is intended to ensure attorney fees clauses are mutual, which means an
award of attorney fees is available on the same terms to all parties. (Santisas, at pp. 616–
617.) Finally, section 1717 was intended to standardize the manner of determining the
amount of a reasonable fee. (See PLCM Group, Inc. v. Drexler (2000) 22 Cal.4th 1084,
1096.)
Limiting attorney fees to parties who have encountered unreasonable conduct does
not offend any of these policy objectives. It does not alter the definition of a prevailing
party. The party who has prevailed in the litigation, and thus is eligible for an award of
attorney fees, must be determined according to section 1717. The limitation does not
change the nature of this determination; it means only that the prevailing party, as so
determined, will not necessarily recover attorney fees. As Leamon implicitly recognized,
section 1717 contains no requirement that a prevailing party must recover attorney fees
under a contractual attorney fees provision. (Leamon, supra, 107 Cal.App.4th at p. 436.)
6
The same contractual restriction found in Leamon has been enforced in other
decisions as well. (E.g., Lange v. Schilling (2008) 163 Cal.App.4th 1412, 1417.)
14
Second, there is no violation of the principle of mutuality. Both Abbey and Fortune
would be allowed fees only if the opposite party is found to have acted unreasonably. 7
Finally, the limitation does not affect in any way the calculation of the amount of fees
awardable, once an award is found appropriate. Because this limitation does not
contradict the public policy objectives of section 1717, it should have been enforced by
the trial court.
III. DISPOSITION
The award of attorney fees to Abbey is reversed.
_________________________
Margulies, Acting P.J.
We concur:
_________________________
Dondero, J.
_________________________
Banke, J.
7
This illustrates the flaw in the trial court‘s rationale, which would defeat the
mutuality of the attorney fees clause. Under the trial court‘s reasoning, Fortune would be
bound by the language of the clause had it been found enforceable, yet Abbey was found
entitled to fees without regard to the unreasonable conduct limitation because the clause
was found unenforceable. Section 1717 forbids such a double standard.
15