The Unintended Consequences of Reserving Your Contractual Right to Recover Attorney’s Fees

When entering into a business agreement, there is always a written contract (or at least there should be). Often times, no one ever looks at the contract again after it is signed, unless there’s a problem. Ideally, the contract serves to lay out the rules of the road and maximize legal protection in the event of a dispute. To that end, many people insist on an “attorney’s fees” clause, which allows the prevailing party to recover their attorney’s fees should they sue or be sued. This is not always the best option. Most people would agree that it does not make economic sense to pursue a lawsuit when there’s only $60,000 in damages if it’s going to cost $300,000.00. The prospect of the prevailing party’s attorney recovering attorney’s fees, however, can motivate individuals to pursue matters they would otherwise simply let go. So, you might be asking, “why don’t I just include an attorney’s fees clause in all my contracts that only allows me to recover my attorney’s fees if I have to sue someone to enforce the contract?” The reason is California law does not allow just one party to a contract to carve out the right to attorney’s fees. California Civil Code § 1717 provides that any right to attorney’s fees under a contract must be reciprocal. If you include an attorney’s fees clause in your contract that says only you can recover your attorney’s fees in the event you have to sue to enforce the contract, the court will rewrite the agreement to allow any party to the agreement to recovery attorney’s fees in the event of a lawsuit to enforce the agreement. The recent case of Hjelm v. Prometheus Real Estate Group, Inc., serves as a good reminder of this: In May 2011, two residents signed a residential lease agreement to rent an apartment. The residents signed a contract with an attorney’s fees clause that required that the residents pay the landlord’s attorney’s fees in the event of a dispute, but not the other way around—only the landlord could ever recover attorney’s fees in the event of a dispute under the contract. A year into the contract, the residents sued their landlord for breach of the lease agreement. After several years of litigation, the residents ultimately prevailed, being awarded economic damages of $11,652, non-economic damages of $60,000 and “reasonable attorney’s fees” in the amount of $326,475.00. The landlord argued that the contract only allowed the landlord to recover attorney’s fees in the event of a lawsuit. The court disagreed, finding that Civil Code§ 1717 makes any right to attorney’s fees under a contract reciprocal. What’s the takeaway? Think about the economics of attorney’s fees in litigation. If any party under a contract can recover attorney’s fees to enforce a contract, then every party can recover attorney’s fees under that contract. Obviously, the landlord in Hjelm did not intend for this result when it drafted this contract, and so it is equally important when drafting a contract that protects your interests to make sure that the contract terms are actually enforceable so that you can feel confident that you are fully aware of your rights and liabilities.