The General Rule in California: The Winner Does NOT Receive Attorney Fees and Costs:
There is a common misconception that court decisions require the loser in a lawsuit to reimburse the winner for the fees and costs incurred during the lawsuit. Reliance on this misconception in developing a legal strategy for dealing with disputes is a serious strategic error. Where the legal issue is, for example, “breach of contract,” the general rule in California is that there are only two methods by which the winning litigant will be awarded the attorney fees and costs incurred in bringing or defending the lawsuit. The first of these is if the contract in question contains an effective attorney fee clause specifically providing that the prevailing party will recover their attorney fees and costs. The second is if there is a statute on point which provides that the prevailing party will be awarded those fees and costs. The general rule in California is that each party pays their own attorney fees and costs, unless there is an independent legal basis that provides otherwise. This is known as the “American Rule,” used throughout most of the country.
The Issue is Important Because Spending More Money Than You Can Be Awarded is a Losing Strategy:
The importance of whether the prevailing party in a lawsuit will be awarded their fees and costs cannot be underestimated. The party contemplating whether to bring a lawsuit must seriously consider whether it is even worth the trouble. In many cases, unless the one bringing the lawsuit (the “plaintiff”) is entitled to be reimbursed for the considerable attorney fees and costs incurred in bringing the case, it is just not worth doing so. There is no point spending $50,000 on attorneys on a $40,000 claim unless the plaintiff can be awarded both the $40,000 and the $50,000 if the plaintiff wins. Unless fees and costs are awarded, the plaintiff will still be out $10,000 in the very best of cases. For a party sued (the “defendant”) a similar situation arises in that the defendant faces the reality that it may be less expensive to just pay on a frivolous or false claim than to fight it. Either scenario is unsatisfactory. On the whole, it is beneficial to have an attorney fee clause in a contract when either a plaintiff or a defendant must vindicate its rights. Both deserve to be fully compensated to achieve justice. It is also beneficial to have an attorney fee clause in a contract to encourage the one who is at fault to resolve the case rather than risk paying the fees and costs of the other party who is likely to win the case. In either case, the presence of an attorney fee clause facilitates the party in the right and encourages resolution outside of litigation. These are admirable societal goals.
The Usual Situation Regarding Attorney Fees In California Construction:
In California construction, the American Rule is followed. If there is a statute providing that the prevailing party is awarded attorney fees and costs in a particular situation, then the prevailing party is protected. However, as to the prevalence of attorney fee clauses in contracts and subcontracts, the problem is that the one signing the contract or subcontract must generally sign the contract provided by another party. Generally speaking, a “direct contractor” signs the contract provided by the owner of the property where the work is performed. The subcontractor signs the subcontract provided by the direct contractor. Whether there is an attorney fee clause in either case depends on whether the one providing the contract or subcontract has decided to include an attorney fee clause in the document. There is cause for suspicion when there is no attorney fee clause in the contract or subcontract. In such a case, the party leaving out the clause may intend to leverage the absence of such a clause to their advantage when a later dispute arises. The signing party is often unable to alter the situation without additional effort and resistance. It is important that any effort to include an attorney fee clause in a contract or subcontract occur in the negotiation phase. Once the contract or subcontract is signed, the opportunity is lost.
Contractual Strategies to Include Attorney Fee Clauses:
There are several methods to be assured that you will have an attorney fee clause in your contract and ensure that you will be able to fully recover on your claim when you are in the right. Again, these are tasks to be accomplished before a party signs a contract to provide goods or services. Accomplishing these tasks before signing the contract will help establish the standards to be followed if a dispute arises during or after performance of the contractual obligations:
- Condition all bids and proposals on the inclusion of an Attorney Fee Clause which is clearly stated in the terms of the bid or proposal. This way, if the bid is accepted, so is the attorney fee clause.
- Condition all bids and proposals on incorporating the bid or proposal into any subsequently executed contract or subcontract for the project. This makes the clause a material term of the later integrated agreement.
- Require, within the bid or proposal, that the bid or proposal will “control and take precedence” over any other terms contained elsewhere in the subsequently executed contract or subcontract. This will allow the term to control over conflicting terms in other contractual documents produced at a later time.
- Make it clear in the bid or proposal that the one accepting the bid or proposal must not accept it unless it agrees to do so without exception or reservation. This puts the choice on the one who wants the service. It is a practical step that tends to show clear intent.
- Make sure that any subsequently executed contract or subcontract clearly incorporates the bid or proposal into the contract or subcontract as an exhibit. Make sure of this before signing the agreement. This ensures that contractual technicalities are met.
There are many ways that the above tasks can be accomplished. Please consult with an attorney experienced in construction law to assist you in including the proper language in your bids, proposals, and other contractual documents.
Helpful California Construction Statutes Providing for Attorney Fees:
As noted above, the second way in which attorney fees are awarded in a construction dispute in California is when there is a statute so providing. In California, there are a number of statues providing that the winner of a construction dispute will be awarded attorney fees and costs. For the direct contractor, the statutes usually provide that an owner must pay the direct contractor within a very short period of time unless there is some disputed issue which the owner is offsetting against the payment. The penalty for non-payment is generally up to an additional 2% interest per month, along with attorney fees and costs. For Subcontractors, there are similar statutes also providing for a penalty of up to 2% per month, along with attorney fees and costs when the contractor or a superior subcontractor is paid for the claimant subcontractor’s work and does not pass that same payment on to the claimant subcontractor. In either case, the successful unpaid claimant would be entitled to possibly up to 2% per month as well as attorney fees and costs. There are some statutes which may allow for interest exceeding 2% per month.
For direct contractors, the following statutes should be reviewed (live links as of writing provided):
Civil Code §§8800-8802 : https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=CIV&division=4.&title=2.&part=6.&chapter=8.&article=1.
Civil Code §§8810-8822: https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=CIV&division=4.&title=2.&part=6.&chapter=8.&article=2.
Public Contract Code §7107: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=PCC§ionNum=7107.
Public Contract Code §10261.5: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=PCC§ionNum=10261.5.
Public Contract Code §20104.50: https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=PCC&division=2.&title=&part=3.&chapter=1.&article=1.7.
For subcontractors, the following statutes should be reviewed (live links as of writing provided):
Civil Code §§8810-8822: https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=CIV&division=4.&title=2.&part=6.&chapter=8.&article=2.
Business and Professions Code §7108.5: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=BPC§ionNum=7108.5.
Public Contract Code §7107: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=PCC§ionNum=7107.
Conclusion:
When construction claimants are in the right, they should be entitled to attorney fees and costs to pursue and defend claims. When owners, contractors and subcontractors fail to pay those making legitimate claims they should be forced to pay fees and costs due to their failure to do so and should not be able to leverage their subordinate professionals to compromise for lesser sums. At the same time, contractors who must bring actions against irresponsible subcontractors who fail to perform their work or against owners who do not pay them should be able to recoup their fees and costs for having to bring an action against them. In each case, the absence of a provision for attorney fees and costs allows a wrongful party to take advantage of the party who is without fault. With a proper attorney fees and costs clause, this issue can be mitigated, and cases can be resolved before litigation becomes necessary. Hopefully, the above information will allow responsible members of the construction industry to act to protect their interests when they are in the right and resolve their differences when they are at fault.
Article by William L. Porter, Esq. Mr. Porter is a principal in The Porter Law Group, Inc. in Gold River, California. He can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com and www.AppliedLegal.com
