Beware of Breadth of Attorneys Fees Clauses in Contracts
Maynard vs. BTI Group, Inc., 2013 Westlaw 2322608 (California Court of Appeals 2013):
Facts: An individual owned a retail business and retained a broker to help her sell it. Although the business was sold, the purchaser soon filed a bankruptcy petition, leaving a portion of the purchase price unpaid. Supposedly, the broker failed to obtain security from the purchaser, despite the seller’s instructions to do so.
Following the purchaser’s default, the seller brought suit against the broker, asserting claims for breach of contract and negligence. She prevailed on her negligence claim but not on her contract claim. The trial court also awarded her attorney’s fees. The broker appealed, claiming that it had prevailed over her on the contract claim and that the seller should not have received an award of fees.
Reasoning: The appellate court affirmed, citing the fee clause in the listing agreement, which provided that the "prevailing party in the event of . . . litigation shall be entitled to costs and reasonable attorney fees . . . ." The court reasoned that this language meant that since the purchaser received a net recovery, she was entitled to fees, even though she had not prevailed on the contract:
Unlike some attorney fee provisions that restrict the right to recover attorney fees to the party prevailing on a breach of contract claim, in which case the outcome of other claims does not affect the right to recover attorney fees, the agreement in this case entitles the party who prevails in the overall dispute to recover its attorney fees.
The court noted that a fee provision can be narrowly drafted to focus solely on contractual claims:
[W]hen the attorney fee provision provides that the party who prevails on the contract claim shall recover its attorney fees, only that party may recover its fees even if the other party obtains greater relief under a noncontractual cause of action.
However, the fee clause at issue in this case was not expressly restricted to contractual claims:
If the attorney fee provision does encompass noncontractual claims, the prevailing party entitled to recover fees normally will be the party whose net recovery is greater, in the sense of most accomplishing its litigation objectives, whether or not that party prevailed on a contract cause of action.
Finally, the court held that "[i]f the attorney fee provision is broad enough to encompass contract and noncontract claims, in awarding fees to the prevailing party it is unnecessary to apportion fees between those claims."
As a fallback, the broker argued that even if the seller were entitled to recover fees for the tort claim, the broker should have been entitled to recover fees because it prevailed on the contract claim. The court disagreed:
This contention disregards the terms of the contractual attorney fee provision. That provision does not entitle the party prevailing on a particular cause of action to recover its fees incurred in connection with that cause of action. Rather . . . , the agreement is that the party who prevails in arbitration or litigation of ‘any dispute’ shall recover its costs and reasonable attorney fees.
Comment: This case illustrates the hidden risk of fee clauses. I have long argued that fee clauses are dangerous because they can result in paradoxical (and asymmetrical) liability for commercially-sophisticated drafters (such as lenders). The drafting party is rarely able to collect a fee award from the less-sophisticated party, who is often judgment-proof. Thus, the fee clause provides no meaningful protection for the drafting party in the event of victory, while still exposing that party to substantial liability in case of a loss.
Nevertheless, if the drafter really wants to include a fee clause despite those risks, this case provides some drafting tips. First, the clause should expressly restrict the scope of the clause to contractual claims and should specifically exclude tort claims. Second, the clause may provide that the prevailing party on the contract claim may recover its fees, even if the opposing party prevails on noncontractual claims. At a minimum, the contractual fee award may offset any tort damages recovered by the non-drafting party.
There is one passage in this opinion that may need clarification. The court stated that "when the attorney fee provision provides that the party who prevails on the contract claim shall recover its attorney fees, only that party may recover its fees even if the other party obtains greater relief under a noncontractual cause of action." Note, however, that if the prevailing party invokes a noncontractual theory (such as fraud) in order to prevail on both the tort and contract claims, the trial court may award fees to that party incurred in connection with all of the claims, if the issues were "inextricably intertwined." See, e.g., PM Group, Inc. v. Stewart, 154 Cal.App.4th 55, 69-70, 64 Cal.Rptr.3d 227, 238 (2007).
For discussions of earlier cases involving comparable "asymmetrical fee liability" situations, see:
- 2011 Comm. Fin. News. 103, Broadly Worded Attorney’s Fee Clause Contained in Asset Transfer Agreement May Be Asserted Against Nonsignatory, After Nonsignatory Unsuccessfully Seeks to Enforce Agreement against Asset Transferee.
- 2011 Comm. Fin. News. 92, Guarantor Who Is Not a Signatory to Underlying Agreement Is Nevertheless Entitled to Assert Attorney’s Fee Clause in Agreement, Even Though Guaranty Contains No Fee Clause.
- 2010 Comm. Fin. News. 95, Debtor May Recover Attorney’s Fees Incurred During Prosecution of Creditor for Violation of Automatic Stay.
- 2009 Comm. Fin. News. 76, Assignee of Contract That Does Not Contain Attorney’s Fee Clause Cannot Invoke Fee Clause Contained in a Related Contract That Was Not Assigned, Despite Broad Wording of Fee Clause.
- 2007 Comm. Fin. News. 84, Broadly Worded Attorney’s Fee Clause Encompasses Fees Incurred in Connection with Both Contract and Tort Claims.
- 2005 Comm. Fin. News. 66, Lender Is Liable for Attorney’s Fees Incurred by Nonsignatory Account Debtor, Even Though Underlying Agreement between Account Debtor and Borrower Did Not Contain a Fee Clause.
- 2004 Comm. Fin. News. 61, Narrowly-Drafted Attorney Fee Clause Does Not Encompass Fees Incurred in Contract Defense to Tort Action.
This analysis was published by the California State Bar Business Law Section’s INSOLVENCY LAW STANDING COMMITTEE