In a recent opinion, the California Court of Appeal held that a party could be liable for the prevailing party’s attorney fees and costs even though the underlying contracts were deemed void and unenforceable.
In California-American Water Company v. Marina Coast Water District, 2017 WL 6397685, Marina Coast Water District (“Marina”) challenged the trial court’s order awarding attorney fees and costs to the respondents based on contracts that the court deemed void. The contracts provided that the prevailing party of any action or proceeding in any way arising from their agreement would be entitled to an award of attorney fees and costs. Marina contended that California Civil Code section 1717 authorizes a fee award only in cases involving an “action on contract,” but that Section 1717 could not apply because the contracts at issue had been declared void.
Section 1717, subdivision (a) provides that in an action on a contract that specifically provides for recovery of attorney fees, “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.” (Emphasis added.)
The First Appellate District admitted some “intuitive appeal” to Marina’s argument that a contractual attorney fees provision could not apply if the contract was deemed void from its inception. However, the Court ultimately concluded Marina’s argument to be unpersuasive.
The Court’s conclusion was based upon Santisas v. Goodin (1998) 17 Cal.4th 599. In that case, the California Supreme Court stated that the “primary purpose of section 1717 is to ensure mutuality of remedy for attorney fee claims under contractual attorney fee provisions.” (Santisas, supra, 17 Cal.4th at p. 610.) The Santisas Court explained that the section safeguards mutuality of remedy in two circumstances: (1) when a contract expressly provides the right to collect attorney fees to one party but not the other; and (2) when a person sued on a contract containing a provision for attorney fees to the prevailing party defends the litigation by successfully arguing the inapplicability, invalidity, unenforceability, or nonexistence of the same contract. (Id. at p. 611.) In both scenarios, absent Section 1717, the right to attorney fees would be effectively unilateral. To ensure mutuality of remedy, when a party litigant defends a contract claim 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. (Ibid.)
In other words, had Marina prevailed in its effort to enforce the contracts, no one would dispute Marina’s entitlement to recover its attorney fees. Because the respondents successfully argued that the parties’ contracts were void, the mutuality of remedy doctrine required that respondents have the right to recover their attorney fees.
The Court noted that a different rule applies under section 1717 if a contract is held unenforceable because of illegality. However, the Court concluded that those concerns were inapplicable because the subject matter of Marina’s contracts was not illegal.
California-American Water Company serves as a reminder that a contractual attorney fees provision will survive a finding that the contract is void for reasons other than illegality.