Steven Otto

Partner, Crosbie Gliner Schiffman Southard & Swanson LLP (CGS3).

When negotiating contracts, there can be a disparity in leverage and negotiating strength, or an inability to agree on specific provisions. On occasion that may lead the party with more leverage to attempt to negotiate onerous or one-sided provisions into the contract. While the power to contract typically leaves great discretion to the parties involved, there are times when the law will intervene - regardless of the terms and conditions of the contract.

An attorney's fees provision - or a prevailing party clause - is one example of a contract provision that may be constrained by statute and case law, despite the express terms of the contract. Typically, parties will negotiate an attorney's fees provision that provides for the granting of those fees to the "prevailing party" and applies to both parties. The provision often will indicate how the prevailing party will be determined, whether the provision applies to appeals, whether the costs of experts will be included, and other negotiated factors. However, with an unlevel playing field, any attempts to make the attorney's fee provision one-sided may be preempted by California Civil Code Section 1717, with respect to contractual claims.

Section 1717(a) states, in part (emphasis added), as follows:

"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.

* * *

Attorney's fees provided for by this section shall not be subject to waiver by the parties to any contract which is entered into after the effective date of this section. Any provision in any such contract which provides for a waiver of attorney's fees is void."

It is important to note that Section 1717 does not create an attorney's fees provision where none exists. Nor does it modify an attorney's fees provision where the ability to award attorney's fees is discretionary, e.g., if the provision indicates that attorney's fees "may" be awarded, they are not mandatory and therefore Section 1717 would not apply. As indicated above, the parties cannot agree to waive the protections of Section 1717. Finally, Section 1717 does not apply where an action has been voluntarily dismissed or dismissed pursuant to a settlement, since there is no prevailing party.

Like many things that lead to litigation, there are case law exceptions to the general rule, among them:

· For Section 1717 to apply, California law needs to apply to the contract, which may be judicially determined under choice of law principles.

· If the litigated action contains claims pursuant to contract as well as tort, Section 1717 will apply to the contract claims, but not the tort claims. Attorney's fees under the tort claims would be evaluated under the terms of the contract's negotiated attorney's fee language.

· A party would need to be a party to the contract in order for attorney's fees to be available pursuant to Section 1717, however, third party beneficiaries to contracts have been entitled to attorney's fees under Section 1717.

To determine whether or not an exception applies to the general rule requires an evaluation of the facts in dispute and applicable case law.

An interesting example is one in which a contract was prepared, but (a) one party claims that it was never finalized, executed, agreed upon, or makes other claims to the effect that the contract is unenforceable, and (b) the other party claims that the contract is enforceable. In an ironic twist, if the party who claims that the contract was not enforceable is the prevailing party, that prevailing party will be entitled to attorney's fees pursuant to the attorney's fees provision of the contract alleged to be enforceable by the other party - even if the contract itself is found to be unenforceable. In Santisas v. Goodin (1998), the California Supreme Court stated that:

"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."

Ultimately, if the claims are based on contract and the court applies California law, a one-sided attorney's fees provision imposed by one party to the disadvantage of other parties to the contract will in most cases be interpreted as a provision to the mutual benefit of all parties to the contract.