Contract Drafting Series: Three - Attorney's Fees

Contract Drafting Series. Attorney’s Fees.

Hey! It’s Shaunt of the Oozoonian Law Corporation. Welcome to the third article in this series.

Today we look at attorney’s fees provisions and how California law interprets these provisions. The attorney’s fees clause in the sample PSA (not drafted by OLC) reads as follows:

“If any enforcement action is required for any performance due under this Agreement, the Buyer is entitled to recover its reasonable attorney’s fees and costs from the Sellers.”

Upon reading this provision I can guess that the Buyer is the one who drafted this contract and that most likely not much negotiation went into the contract drafting aspect of the transaction. The provision is one-sided. Only the Buyer is entitled to recovery its attorney’s fees in the event an enforcement action is brought. The Sellers should have negotiated the drafting of the contract to make sure that they would also have the opportunity to recover their attorney’s fees if they are the ones who need to “enforce” the agreement, or if they successfully defend an “enforcement” action brought by the Buyer. Nevertheless, the Seller’s hopes to recover their attorney’s fees is not entirely lost.

Before we get into that, let’s quickly discuss what an enforcement action is, and what this provision actually does.

An enforcement action is a lawsuit brought by one of the parties to the contract against the other party in order to recover money damages for the other party’s breach or to have a judge order (force) the other side to perform what they failed to perform. As you may imagine, both parties now have to hire a law firm to represent them in that suit. Both sides take on expenses in the form of legal services. These expenses are the expenses contemplated by the contract.

So, this provision states that, if the Buyer files a lawsuit because the Sellers failed to perform (give the item) and Buyer win the lawsuit, then Buyer is entitled to recover the money the Buyer spent to hire its lawyers. Now, the attorney’s fees have to be “reasonable” and usually a motion needs to be brought after the Buyer wins for the judge to determine what is reasonably.

But let’s say this is the provision in the contract and let’s say Buyer fails to perform. Can the Sellers still recover their attorney’s fees if they win?

The contract says no, but California law says yes!

California Civil Code section 1717 states: “(a) 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.”

In short, and applied to our provision above: even though the Buyer is the only party listed as having the right to recover attorney’s fees, if the Sellers win under the contract in the lawsuit, the Sellers are entitled to recover their attorney’s from Buyer.

This law transforms what would have been a unilateral right to attorney’s fees into a reciprocal provision.

While the Sellers didn’t get entirely screwed for their failure to negotiate the terms of the contract in this particular provision, California law might not save Sellers in the other provisions of the PSA that Sellers didn’t negotiate.

- Shaunt Oozoonian

Oozoonian Law Corporation