By: Richard E. Korb
This is Part II in a five part series regarding important contract clauses you should understand to manage risk and reduce business and legal costs.
RICHARD E. KORB is a seasoned attorney with 30 years of business litigation and transactional (contracts) experience. Over his legal career, Richard has successfully litigated and resolved over 300 court cases in the fields of contract law, real estate, employment, unfair competition, and general civil law and he has drafted and negotiated over 250 contracts and licenses for large and small companies alike. Richard leverages his experience as a former partner in a 100-person law firm and chief counsel for a public software company to assist individuals and companies, from start-ups to multi-nationals, with a broad spectrum of legal matters. In addition to his legal practice, Richard is a court-approved mediator and serves on the Alternative Dispute Resolution (ADR) panel for both the Alameda and Contra Costs County Superior Courts. ©2008
Introduction With the current healthcare debate, we all understand the importance of preventive medicine,–exercise, eating right, getting regular checks-ups and taking other preventive measures to stay healthy and reduce the risk of major illness …but how many of us apply that same wisdom to our business affairs? Regardless of one’s business or occupation, age or income, at one time or another you will enter into a legally enforceable agreement ( a contract) with a person or company involving significant sums of money (a contractor wanting to remodel your home, a buyer wanting to buy your car, a realtor wanting a listing on your house, an employer wanting you to sign a non-compete or non-solicitation agreement; a supplier wanting to supply your company with software; a distributor wanting to sell some product you own to others.) Whether it is a personal contract worth a few thousand dollars or a business transaction worth hundreds of thousands, in each case, you are agreeing to terms that could significantly impact your future.
Yet how many people actually take the time to actually review and understand their contracts or bother to consult a lawyer BEFORE or they sign them? Very few do. Over the last 30 years, time and time again, I’ve seen clients who came to me only after they were in the middle of a legal dispute. When I asked to see the contract they signed, I was often shocked by the content, or lack of it—leaving them exposed to legal or financial risk. The bad news is that despite the fact that written contracts are supposed to protect you in the event of a legal dispute, often they are so confusing or ambiguous or one-sided or incomplete—that they do little to protect you from the financial and emotional risks and costs of court…The good news is that there are basic preventive steps that you can take up-front to help minimize the risk and costs of litigation:
FIVE Contract ou Should Understand And Seriously Consider To Help You Control Costs, Limit Liability And Avoid Court: ADR, Attorney’s Fees, Forum Selection, Indemnification and Limitations On Liability.
The Attorneys Fees’ Clause
Many legal cases result in legal fees exceeding the amount of damages that were sought and awarded. Often business people opt not to pursue unpaid fees from a customer or client because the cost of collecting the fee is not worth the amount sought. As one appellate jurist wisely observed, “All too often attorney fees become the tail that wags the dog in litigation.” (Deane Gardenhome Assn. v. Dentkas, 13 Cal.App.4th 1394, 1399 (1993). Indeed, the cost of litigation can often be greater than the amount you are trying to recover.
In the absence of a specific provision in the Agreement, each party to litigation will have to bear its own attorneys’ fees. (Cal. Civ. Proc. Code §1021). Many people have the mistaken impression that the loser must always pay the prevailing party’s attorney fees. Most countries operate under a “loser pays” system, sometimes called the. Under the English rule, the losing party pays the successful party’s attorney fees, as well as other court costs. The United States is a notable exception– absent statute, contract or in the case of vexatious, completely frivolous litigation—which is very hard to prove. (The responsibility for each side to pay their own legal fees is so distinctly a part of the judicial system in the United States that it is known as the “American Rule”).
One contract clause that can reduce the cost of collection is a section in the contract shifting the cost of the prevailing party’s attorney fees and litigation costs to the losing party.
Sample Clause: “In any legal action or other proceeding brought to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys’ fees and costs.”
Parties contracting in California need to be aware of California Civil Code Section 1717, which provides that any contractual attorney fees provision must be applied mutually and equally to all parties to the contract, even if written otherwise. Hence, under California law, if a contract provides that either party shall recover attorneys’ fees and costs on a prevailing-party basis, that same right shall be afforded the other party whether the contract so specifies or not. (Cal. Civ. Code §1717).The statute also provides that if attorneys’ fees are available for a portion of a contract, they shall be available for the entire contract.
However, there are limitations to this clause that reduce its effectiveness. First and foremost, only reasonable attorney’s fees can be awarded (regardless of what the clause says) and the interpretation of what is “reasonable” is up to the judge hearing the case.
Reasonable Fees. Since only “reasonable fees” can be sought and collected, the winner should not expect to be compensated for the most thorough legal representation or for all legal avenues that were pursued. There are different methods for calculating reasonable fees that are beyond the scope of this discussion. For example:
In California, the calculation to determine a “reasonable fee” usually begins with the “Lodestar method”: the number of hours reasonably expended multiplied by the reasonable hourly rate. The reasonable hourly rate is that prevailing in the community for similar work. (Margolin v. Regional Planning Com. (1982) 134 Cal.App.3d 999, 185Cal.Rptr. 145.) The lodestar figure may then be adjusted based on factors (e.g. complexity of case, degree of liability, risks) specific to the case in order to fix the fee at the fair market value for the legal services provided. (Serrano v. Priest (1977) 20 Cal.3d 25, 141 Cal.Rptr. 315, 569 P.2d 1303).
Another method–the “Cost Plus” method for calculating attorney’s fees begins by taking the actual attorney’s fees incurred and then adjusting the figure based on the specific factors of the case to reach a figure.(Trope v. Katz (1995) 11 Cal.4th 274, 280.)
But judges are not bound by any one method: Often judges will look at what is the minimum cost in achieving the award—a completely subjective analysis. In other cases, the judge or “Court” will base the fee award on the size of the verdict and the proportion of the total sum of fees incurred in relationship to the verdict obtained.
This means that if you sue for $20K in damages and your fees are $20K, even if you win, you may only recover 25% of your fees even though all the fees were necessarily incurred. By contrast, if you sue for $200K in damages and your fees are $20K, you are more likely to recover most, or all, of your fees. I say “likely” because ultimately the size of the fee award is in the discretion of the trial judge hearing the case.
Prevailing Party: Often in litigation, complete victory seldom occurs. The statute describes the prevailing party as “the party who recovered the greater relief in the action on the contract.” (Cal. Civ. Code § 1717(b) (1).). In simple terms, the prevailing party is defined as the party that on a practical level is said to have succeeded in achieving a measure of their goals when compared against the other party. Accordingly, the term “prevailing” is subject to broad interpretation by the judge hearing the case. E.g., if you seek $20K in fees that the client denies entirely and you are awarded only $14K in fees as a result of the judgment, you would be considered to be the prevailing party even though you didn’t win the full amount. But what if your opponent simultaneously brings a counter claim against you for $10K and wins $5K. It gets tricky.
Judge Has Wide Discretion: In both deciding what is a reasonable fee award and who is the prevailing party, the golden rule of attorney fee awards is that the judge/court has tremendous discretion in awarding reasonable attorney’s fees. This makes it hard to predict going into litigation, how much of your fees you can expect to recover should you win. And don’t count on successfully appealing a judge’s award: The standard of review is “abuse of discretion,” since the judge is presumably in the best position to determine the value of the services rendered by counsel. The law is clear that the appellate court may not disturb the judge’s decision unless it is convinced it was clearly wrong.
Voluntary Dismissal Or Settlement: What if you voluntarily dismissed the action before trial or reached a settlement? Then typically there would not be a prevailing party. But if you were forced to dismiss the action as a result of a court ruling against you, your opponent could well be found to be the prevailing party. But the court usually determines the prevailing party as part of the judgment.
Next Time: What are Pros and Cons of Having Such a Clause In Your Contracts?
For Free Consultation:
To schedule a free consultation with Richard Korb, call us at: (510) 524-0903 or e-mail us at:
info@korblaw.com
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