Opinion
F072497
02-20-2018
CITY OF DINUBA, Plaintiff and Respondent, v. UNIVERSAL BIOPHARMA RESEARCH INSTITUTE, INC., Defendant and Appellant.
Doerksen Taylor Stokes, Charles L. Doerksen and Michael J. Fletcher for Defendant and Appellant. Betts & Rubin, James B. Betts and Joseph D. Rubin for Plaintiff and Respondent.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. VCU252804)
OPINION
APPEAL from a judgment of the Superior Court of Tulare County. Lloyd L. Hicks, Judge. (Retired Judge of the Tulare Super. Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.) Doerksen Taylor Stokes, Charles L. Doerksen and Michael J. Fletcher for Defendant and Appellant. Betts & Rubin, James B. Betts and Joseph D. Rubin for Plaintiff and Respondent.
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Respondent, the City of Dinuba (City), filed an unlawful detainer action against appellant, Universal Biopharma Research Institute, Inc. (Biopharma), Universal, Inc., and Kuldip Thusu for failure to pay rent under a commercial lease. The lease agreement did not name Biopharma as a party. The lease listed Universal, Inc., a nonexistent entity, as the tenant. Thusu, Biopharma's president and chief executive officer, signed the lease, describing himself as the president of Universal, Inc. Thusu also signed a personal guarantee of the lease. A jury found Biopharma was not a party to the lease and thus was not liable to the City.
After obtaining this defense verdict, Biopharma moved for attorney fees under the lease. The attorney fees provision states that, in the event of legal proceedings brought by either party, the prevailing party "may" be entitled to recover attorney fees. Finding that the attorney fees clause was permissive, the trial court exercised its discretion and concluded Biopharma was not entitled to recover attorney fees.
Biopharma contends that an award of attorney fees is mandatory under Civil Code section 1717 and therefore the trial court erred in finding it had discretion to deny Biopharma's attorney fees request. According to Biopharma, section 1717 requires courts to interpret all contractual attorney fee clauses as mandatory regardless of the language in the contract.
All further statutory references are to the Civil Code unless otherwise stated. --------
The trial court correctly found the attorney fees provision was discretionary. Therefore, we affirm the judgment.
FACTUAL BACKGROUND
The City entered into a lease with Universal, Inc. to rent the City's Vocational Center for 10 years. However, at no time did an entity named Universal, Inc. exist. At the time, Thusu was the president and chief executive officer of Biopharma. Thusu signed the lease agreement and a later amendment to the lease representing himself as the president of Universal, Inc. rather than his existing company, Biopharma. Thusu also executed a personal guarantee to the lease agreement.
Thusu, or one of the entities he controlled, failed to make rent payments. The City filed an unlawful detainer action against Universal, Inc. and a breach of contract action against Thusu under the guarantee. The City claimed damages for past due rent and late charges. In its action, the City also sought repossession of the premises, forfeiture of the lease agreement, and future rents for the remainder of the lease term. The City later amended the complaint against Universal, Inc. to add Biopharma as a defendant.
The City proceeded to trial on the theory that Biopharma was the true corporate entity that was bound by the lease. The jury found that Biopharma was not a party to the lease and, therefore, not liable to the City for rent under the lease agreement. However, the jury found there was an enforceable contract between the City and Thusu on the guarantee agreement and awarded the City $47,900 in unpaid rent in that case.
After judgment, Biopharma moved for approximately $197,000 in attorney fees based on the contractual provisions of the lease. The trial court interpreted the use of the word "may" in the attorney fees clause based on its plain meaning and concluded that an award of attorney fees to the prevailing party was discretionary. The court further found that general equitable principles should apply to the court's exercise of discretion. Based on those considerations the court found Biopharma was not entitled to recover attorney fees despite being the prevailing party.
On appeal, Biopharma only challenges the trial court's interpretation of the attorney fees clause. It does not challenge the trial court's decision to exercise its discretion to deny the attorney fees motion.
DISCUSSION
Biopharma contends the trial court erred in interpreting the lease agreement as having a discretionary attorney fees provision. It argues that section 1717 should apply and, under the terms of the statute, the award of attorney fees is mandatory. As there was no question that Biopharma was the prevailing party in obtaining a defense verdict, it argues the court lacked discretion to deny granting attorney fees. 1. Standard of review.
Two standards of review govern the interpretation and application of contractual fees provisions. The interpretation of the meaning of the attorney fees clause is reviewed de novo. (Mountain Air Enterprises, LLC v. Sundowner Towers, LLC (2017) 3 Cal.5th 744, 751 (Mountain Air).) However, the decision whether and in what amount to award fees is within the trial court's discretion. "'[I]t is a discretionary trial court decision on the propriety or amount of statutory attorney fees to be awarded, but a determination of the legal basis for an attorney fee award is a question of law to be reviewed de novo.'" (Ibid.) 2. The trial court correctly ruled that attorney fees were permissive under the lease.
With respect to attorney fees, California follows the American rule. Under the American rule, each party to a lawsuit ordinarily pays its own attorney fees. (Code Civ. Proc., §§ 1021, 1033.5, subd. (a)(10); Tract 19051 Homeowners Assn. v. Kemp (2015) 60 Cal.4th 1135, 1142.) Code of Civil Procedure section 1021 provides: "Except as attorney's fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties ...." In other words, Code of Civil Procedure section 1021 permits parties to modify the application of the American rule by executing an agreement that allocates attorney fees. (Mountain Air, supra, 3 Cal.5th at p. 751.)
In analyzing the propriety of awarding attorney fees, we first must determine whether the parties entered an agreement for the payment of attorney fees and, if so, the scope of the attorney fee agreement. To do so, we apply traditional rules of contract interpretation. (Mountain Air, supra, 3 Cal.5th at p. 752.)
Accordingly, the mutual intention of the parties at the time they form the contract governs the attorney fees provision's interpretation. (§ 1636; Santisas v. Goodin (1998) 17 Cal.4th 599, 608 (Santisas).) We infer such intent, if possible, solely from the written provisions of the contract. (§ 1639; Santisas, supra, 17 Cal.4th at p. 608.) We interpret the "clear and explicit" meaning of the contractual provisions in their "ordinary and popular sense," unless "used by the parties in a technical sense, or unless a special meaning is given to them by usage ...." (§§ 1638, 1644.) If the meaning a layperson would ascribe to contract language is not ambiguous, that meaning controls. (Santisas, supra, 17 Cal.4th at p. 608.) At the same time, we also recognize the "interpretational principle that a contract must be understood with reference to the circumstances under which it was made and the matter to which it relates. (Civ. Code, § 1647)." (Xuereb v. Marcus & Millichap, Inc. (1992) 3 Cal.App.4th 1338, 1344 (Xuereb).)
The attorney fees provision at issue here provides:
"Legal Proceedings: In the event of any proceedings brought by either party against the other under this lease, the prevailing party may be entitled to recover the fees of their attorneys in such action or proceedings for such amounts as may be adjudged reasonable attorney's fees." (Italics added.)
The trial court interpreted this attorney fees clause as being discretionary. The court noted that standard attorney fees contracts make an award of fees to the prevailing party mandatory by simply using the word "shall." Here, however, the contract states the prevailing party "may" be entitled to fees.
The trial court's interpretation of the attorney fees provision is reasonable. Ordinarily, the word "may" connotes a discretionary or permissive act and the word "shall" connotes a mandatory act. (Woolls v. Superior Court (2005) 127 Cal.App.4th 197, 208.) 3. Section 1717 does not apply to discretionary attorney fee provisions.
Biopharma does not challenge the trial court's interpretation of the provision as discretionary. Rather, it argues that section 1717 controls the terms of all contractual attorney fees clauses and therefore requires a mandatory award of attorney fees to Biopharma, the prevailing party in this case.
Section 1717, subdivision (a), provides, in part:
"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." (Italics added.)
The Legislature originally enacted section 1717 "to establish mutuality of remedy when a contract makes recovery of attorney fees available only for one party and to prevent the oppressive use of one-sided attorney fees provisions." (PLCM Group, Inc. v. Drexler (2000) 22 Cal.4th 1084, 1090-1091 (PLCM Group).) Section 1717 represents a basic and fundamental policy choice by the state of California that nonreciprocal attorney fees contractual provisions create reciprocal rights to such fees. (ABF Capital Corp. v. Grove Properties Co. (2005) 126 Cal.App.4th 204, 217.) By banning the use of one-sided attorney fees clauses, section 1717 promotes certainty and prevents overreaching both in the negotiation of a contract and in the use of the courts during litigation. (Id. at p. 218.)
Later amendments to section 1717 clarified that it applies to contracts containing reciprocal as well as unilateral attorney fee provisions. (Santisas, supra, 17 Cal.4th at p. 614.) The Legislature also amended section 1717 to state that the court shall fix reasonable attorney fees. Further, such fees are an element of the costs of suit. (PLCM Group, supra, 22 Cal.4th at p. 1091.) In sum, the legislative purpose underlying section 1717 "'is to ensure that contractual attorney fee provisions are enforced evenhandedly[,]'" i.e., to ensure mutuality of remedy. (PLCM Group, at p. 1091.)
As discussed above, the trial court correctly concluded that the attorney fees provision in the lease was discretionary. However, the text of section 1717 limits its reach to contracts with mandatory attorney fees provisions, i.e., where the contract specifically provides that attorney's fees and costs shall be awarded. Thus, by its terms, section 1717 does not apply to the lease agreement at issue here.
Biopharma contends that, despite the permissive attorney fees provision, section 1717 controls and thus an award of attorney fees is mandatory. According to Biopharma, parties cannot agree to an attorney fees clause that provides for a discretionary award to the prevailing party on a contract claim. Rather, Biopharma argues, section 1717 governs all awards of attorney fees arising from the enforcement of contract claims.
To support its position, Biopharma relies on general language in various cases taken out of context. For example, in Santisas, supra, the court stated, that the history of section 1717 "generally reflects a legislative intent to establish uniform treatment of fee recoveries in actions on contracts containing attorney fee provisions and to eliminate distinctions based on whether recovery was authorized by statute or by contract." (Santisas, supra, 17 Cal.4th at p. 616.) Other courts have observed that section 1717 "alone determines a party's entitlement to attorney fees under a contractual fee provision" (Frog Creek Partners, LLC v. Vance Brown, Inc. (2012) 206 Cal.App.4th 515, 544) and that "the specific language of the contract does not necessarily govern the award" of attorney fees (Walker v. Ticor Title Co. of California (2012) 204 Cal.App.4th 363, 372-373). Based on such authority, Biopharma argues that discretionary attorney fees provisions conflict with the terms of section 1717.
However, unlike here, the above cases concerned mandatory attorney fee provisions and thus were under section 1717's ambit. Moreover, this general language does not indicate that courts must construe discretionary contractual attorney fee provisions as mandatory. Rather, it simply reflects the statute's purpose of establishing mutuality of remedy and thereby preventing inequitable mandatory attorney fees awards.
Under Code of Civil Procedure section 1021, parties have the right to make attorney fee agreements. A party's entitlement to attorney fees under such an agreement "begins and ends with the language of the attorney fee clause." (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (2007) 147 Cal.App.4th 424, 429.)
Section 1717 assumes parties have the right to enter into agreements for the award of attorney fees, a right derived from Code of Civil Procedure section 1021. (Xuereb, supra, 3 Cal.App.4th at p. 1342.) However, section 1717 has a limited application. By its terms, it covers contract actions only where the contract sued upon includes a mandatory attorney fee provision. "Because of its more limited scope, Civil Code section 1717 cannot be said to supersede or limit the broad right of parties pursuant to Code of Civil Procedure section 1021 to make attorney fees agreements." (Cf. Xuereb, supra, 3 Cal.App.4th at p. 1342.)
Here, the parties agreed to a bilateral discretionary attorney fee provision, not a one-sided mandatory fee provision. Thus, this attorney fees clause does not contravene either the terms or purpose of section 1717. Section 1717 does not abolish the general rule that parties have the right to enter into contracts with either no attorney fee provision or a discretionary fee provision. Therefore, the lease agreement does not fall under section 1717's ambit. Accordingly, the trial court was not required to award attorney fees to Biopharma.
DISPOSITION
The judgment is affirmed. Costs on appeal are awarded to respondent.
/s/_________
LEVY, Acting P.J. I CONCUR: /s/_________
DETJEN, J. MEEHAN, J., Dissenting.
I. Introduction
In this case of first impression, the majority has created a class of contractual attorney fees provisions that will fall outside the statute enacted to govern them. Contracting parties may circumvent Civil Code section 1717 (section 1717), and undermine the public policies upon which it is based, by making the statute's otherwise mandatory application discretionary in strategically drafted private agreements. Section 1717 governs a narrowly tailored category of attorney fees awards where a party prevails on causes of action to enforce the contract in which a fees provision is contained. Given the statute's narrow focus, and its comprehensive definitions and requirements, it is unlikely the Legislature intended that it would be limited, much less optional, in its application.
I respectfully dissent because neither the legislative history nor the development of the law under section 1717 lends support to the majority's disregard of the statute's mandatory reach. The California Supreme Court has explained in several contexts that it would be inconsistent with the legislative history of section 1717 to find a right to contractual attorney fees independent of the statute. Section 1717 was intended to establish uniformity in contractual attorney fees recoveries and mutuality of remedy, as well as to abrogate the differences based on whether recovery was authorized by statute or by contract. The California Supreme Court and state and federal appellate courts consistently have applied section 1717 to override a contract's terms where they conflict with the statute. It is only in this manner that the fundamental purposes of section 1717 may be achieved uniformly and evenhandedly as intended.
The majority contends that the language of section 1717, subdivision (a), constrains application of the statute to attorney fees provisions that expressly mandate the award of fees by using the term "shall." However, there is nothing in the legislative history or case law under section 1717 to suggest that certain words or phrases are required to invoke its application. On the contrary, the legislative history and case law overwhelmingly support the construction that section 1717 governs all contractual attorney fees provisions to enforce the contract.
According little importance to the law construing the scope and application of Civil Code section 1717, the majority instead relies on Code of Civil Procedure section 1021 as authority for the discretionary fees clause and avoidance of Civil Code section 1717. Code of Civil Procedure section 1021 recognizes that litigants may not recover attorney fees from each other absent authorization by statute or contract and generally provides that the "measure and mode of compensation of attorneys" is left to the agreement of the parties. Code of Civil Procedure section 1021, however, is expressly limited and does not apply when "attorney's fees are specifically provided for by statute." (Code Civ. Proc., § 1021.) Attorney fees are specifically provided for by section 1717 and the California Supreme Court has established that Code of Civil Procedure section 1021 is limited by and subject to section 1717.
Consequently, Code of Civil Procedure section 1021's general proposition that parties may contract for the award of attorney fees does not resolve whether the fees clause is subject to and comports with Civil Code section 1717. Of course, the language of the attorney fees clause must be construed to determine whether it provides for an award based on contract claims only, in which case section 1717 would apply, or whether it provides for an award based on a broader range of claims to include, for example, contract and tort claims, in which case section 1717 would apply only to the contract claims. In addition to determining its scope, the clause must also be examined for conditions and prerequisites to which the parties are free to agree so long as they do not contravene the terms of section 1717. But the foundation of the majority's decision, that the right to contractual fees "'begins and ends'" with the language of the contractual clause (maj. opn. at p. 8), places undue reliance on Code of Civil Procedure section 1021.
In construing the attorney fees provision here, the majority presumes that the permissive term "may" is susceptible only of the meaning that section 1717 does not apply and the trial court was free to make an award of attorney fees to the prevailing party or not. If given consideration on de novo review, the term "may" is susceptible of more than one permissive meaning. In determining whether a party has prevailed in a contract action, a trial court generally faces two possibilities: one where there is a clear winner and clear loser and another where there are mixed results in that both parties achieve some litigation objectives but not others. In the first situation, under section 1717, the court is required to award fees to the party who clearly prevailed. But in the second situation, the court has discretion to find a prevailing party despite the mixed results or to find that no party prevailed. In this context, it is fair to say that a prevailing party may be entitled to an award of fees inasmuch as the court is vested with discretion under section 1717 to decide who, if anyone, might receive fees when litigation results are mixed.
Accordingly, the term "may" in this fees clause is susceptible of more than one meaning and could, and should, reasonably be construed consistent with section 1717 rather than unreasonably construed to upend its statutory scheme. In any event, the majority's construction ultimately cannot stand because section 1717 would override those contract terms that conflict with the statute.
It is ironic that the majority justifies construction of the fees clause as discretionary on grounds that it is reciprocal and "Thus, this attorney fees clause does not contravene either the terms or purpose of section 1717." (Maj. opn. at p. 8.) Absent section 1717, the clause is not reciprocal as to appellant Universal Biopharma Research Institute, Inc. (Biopharma), who the trial court found to have clearly prevailed at trial, but not entitled to attorney fees. Biopharma was not a party to the lease agreement sued upon and, prior to the enactment of section 1717, had no legal right as a nonparty to contractual fees at all. It has only been since section 1717 expressly mandated fees to be awarded to the "party prevailing on the contract, whether he or she is the party specified in the contract or not" (§ 1717, subd. (a), italics added), that nonparties could recover fees for establishing the contract was inapplicable or unenforceable as to them, such as Biopharma did here. Despite the assertion otherwise, the majority's holding contravenes section 1717's fundamental purpose of mutuality of remedy inasmuch as, absent section 1717, Biopharma would not be entitled to fees even if it prevailed in proving the contract was inapplicable or unenforceable as to it. The majority's reference to section 1717 as justification for this attorney fees provision only underscores the statute's exclusive and comprehensive role in governing contractual attorney fees awards. If section 1717 does not apply, there is nothing to ensure that the statute's underlying purpose and policy goals will be achieved in a given contract.
If drafting an attorney fees clause with discretionary language takes it outside the ambit of section 1717, parties and courts are not subject to the statute's requirements that were put into place for good policy reasons. Without the mandatory application of section 1717 to all contractual fees clauses to enforce the contract, parties are free to enter into unilateral agreements, craft their own definition of prevailing party and create their own requirements for reasonableness. Courts have no clear standards independent of section 1717 by which to resolve disputes on those matters. The statute's goal of uniform and evenhanded treatment of attorney fees awards will be defeated and those in unequal bargaining positions will again be exposed to the deceptive and oppressive tactics the statute was designed to eliminate. This result is unwarranted as demonstrated below.
II. Scope and Application of Section 1717
A. Effect of Civil Code Section 1717 on Code of Civil Procedure Section 1021
The introductory clause of Code of Civil Procedure section 1021 states, "Except as attorney's fees are specifically provided for by statute" has been interpreted by the California Supreme Court as applying the restrictions and conditions of Civil Code section 1717 to contractual fees provisions. (Trope v. Katz (1995) 11 Cal.4th 274, 279 ["Although Code of Civil Procedure section 1021 gives individuals a rather broad right to 'contract out' of the American rule by executing such an agreement, these arrangements are subject to the restrictions and conditions of section 1717 in cases to which that provision applies."].) "'California law requiring mutuality of attorneys' fees provisions reflects a strong public policy, overriding another strong public policy of freedom of contract.'" (First Intercontinental Bank v. Ahn (9th Cir. 2015) 798 F.3d 1149, 1157.)
Once it is determined that "litigation does sound in contract, however, an agreement allocating attorney fees may be 'within the scope of ... section 1717' and subject to its restrictions. (Santisas [v. Goodin (1998)] 17 Cal.4th [599,] 617 [(Santisas)].) 'Before section 1717 comes into play, it is necessary to determine whether the parties entered an agreement for the payment of attorney fees and, if so, the scope of the attorney fee agreement.'" (Mountain Air Enterprises, LLC v. Sundowner Towers, LLC (2017) 3 Cal.5th 744, 752 (Mountain Air).)
Despite the California Supreme Court's ruling to the contrary, the majority contends that Civil Code section 1717 does not limit or supersede the broad right of parties to enter into attorney fees arrangements under Code of Civil Procedure section 1021. (Maj. opn. at p. 8.) Code of Civil Procedure section 1021 has been interpreted to allow parties to "validly agree that the prevailing party will be awarded attorney fees incurred in any litigation between themselves, whether such litigation sounds in tort or in contract." (Xuereb v. Marcus & Millichap, Inc. (1992) 3 Cal.App.4th 1338, 1341 (Xuereb).) Compared to Code of Civil Procedure section 1021, Civil Code section 1717 has a limited application and "covers only contract actions, where the theory of the case is breach of contract, and where the contract sued upon itself specifically provides for an award of attorney fees incurred to enforce that contract." (Xuereb, supra, at p. 1342.) The majority mistakenly relies on Xuereb for the proposition that the narrow scope of Civil Code section 1717 does not limit the rights of parties to make attorney fees agreements under Code of Civil Procedure section 1021. (Xuereb, supra, at p. 1342.) However, that holding was based on the fact that the causes of action at issue there sounded in tort rather than in contract, and section 1717 did not apply for that reason. (Xuereb, supra, at p. 1342.) There is no disagreement that contractual attorney fees provisions covering only tort and other noncontract claims are not subject to section 1717. (Santisas, supra, 17 Cal.4th at p. 615 ["If an action asserts both contract and tort or other noncontract claims, section 1717 applies only to attorney fees incurred to litigate the contract claims."].)
The more general terms of Code of Civil Procedure section 1021 do not provide an independent basis for parties to contract around the more specific terms of Civil Code section 1717 when addressing contractual attorney fees provisions. This is consistent with principles of statutory interpretation. (Estate of Kramme (1978) 20 Cal.3d 567, 576 ["[I]f a specific statute is enacted covering a particular subject, the specific statute controls and takes priority over a general statute encompassing the same subject."].) Consistent with the California Supreme Court's holding that Code of Civil Procedure section 1021 is subject to Civil Code section 1717, whenever the terms of the two statutes overlap, the more specific provisions of section 1717 govern attorney fees based on contract causes of action.
B. Purpose of Section 1717
"Civil Code section 1717 was originally enacted to establish mutuality of remedy when a contract makes recovery of attorney fees available only for one party and to prevent the oppressive use of one-sided attorney fees provisions." (PLCM Group, Inc. v. Drexler (2000) 22 Cal.4th 1084, 1090-1091 (PLCM Group); see Hsu v. Abbara (1995) 9 Cal.4th 863, 870.) "Building a reciprocal right to attorney fees into contracts, and prohibiting its waiver, the section reflects legislative intent that equitable considerations must prevail over both the bargaining power of the parties and the technical rules of contractual construction." (International Industries, Inc. v. Olen (1978) 21 Cal.3d 218, 224.)
Section 1717 also is intended to "establish uniform treatment of fee recoveries in actions on contracts containing attorney fee provisions and to eliminate distinctions based on whether recovery was authorized by statute or by contract." (Santisas, supra, 17 Cal.4th at p. 616.) As amended, section 1717 applies to all contractual provisions awarding attorney fees incurred to enforce the contract and states that reasonable attorney fees are to be fixed by the court, and are an element of the costs of suit. (PLCM Group, supra, 22 Cal.4th at pp. 1090-1091.) "[S]ection 1717 'creat[ed] a bilateral contractual obligation where a unilateral fee provision previously existed' and that 'thereafter attorney's fees were to be seen as allowed by statute, rather than by contract.'" (Id. at p. 1091.) The history of the statute "consistently adheres to the theme of equity in the award of fees and demonstrates legislative intent to expand the original ambit of the statute by the addition of provisions allowing the court to determine ... the reasonableness of the fees to be awarded." (Sears v. Baccaglio (1998) 60 Cal.App.4th 1136, 1150-1151 (Sears); see Trope v. Katz, supra, 11 Cal.4th at p. 289 [the legislative purpose underlying section 1717 "is to ensure that contractual attorney fee provisions are enforced evenhandedly"].)
C. Preclusive Effect of Section 1717
The California Supreme Court has held that the terms and restrictions of section 1717 apply to all contractual attorney fees provisions to enforce the contract. "If such litigation does sound in contract, however, an agreement allocating attorney fees may be 'within the scope of ... section 1717' and subject to its restrictions. (Santisas, supra, 17 Cal.4th at p. 617.)" (Mountain Air, supra, 3 Cal.5th at p. 752.) Supreme Court case law makes clear that the only contractual attorney fees provisions that fall outside of section 1717 are those that cover noncontract causes of action, such as tort claims. It is therefore correct to say that a contractual attorney fees provision "may" fall within section 1717 because the clause may pertain only to claims sounding in tort or other noncontract claims, in which case section 1717 would not apply. (Santisas, supra, at p. 617 ["This bar, however, applies only to causes of action that are based on the contract and are therefore within the scope of section 1717."].) The claim at issue here regarding the breach of a commercial lease is an "action on a contract" within the meaning of section 1717 and, therefore, section 1717 must be applied.
As demonstrated below, the overwhelming weight of authority construing section 1717 supports its mandatory application to all contractual attorney fees provisions awarding fees for enforcing the contract. No contrary authority under the statute has been provided, including to support the majority's assertion that "the text of section 1717 limits its reach to contracts with mandatory attorney fee provisions, i.e., where the contract specifically provides that attorney's fees and costs shall be awarded." (Maj. opn. at p. 7, some italics added.) The majority's assertion that the term "shall" in subdivision (a) limits the statute's reach oversimplifies the interpretation of that term. "[U]se in [a] statute of 'may' or 'shall' is merely indicative, not dispositive or conclusive," and oftentimes requires looking beyond the plain terms to determine the intent of the drafters. (Tarrant Bell Property, LLC v. Superior Court (2011) 51 Cal.4th 538, 542.) The intent of the drafters is manifested in the legislative history and case law under section 1717, which does not support the majority's assertion.
Although case law addresses the interpretation of other subdivisions of the statute, the general discussions of legislative history and the development of the law under section 1717 applies equally to subdivision (a) as a matter of course. In addition, the California Supreme Court has found subdivisions (a) and (b) of section 1717 to be integrated and the statute "harmonize[d] ... internally" by its dual construction to be both mandatory and permissive, depending on the state of the prevailing parties. (Hsu v. Abbara, supra, 9 Cal.4th at p. 876.) Accordingly, it is unreasonable to construe section 1717, subdivision (a) as limiting the reach of the statute because to do so is against the great weight of authority and would unravel the comprehensive statutory scheme intended by the Legislature.
1. Santisas
In Santisas, the Supreme Court addressed the issue of whether section 1717 precluded an independent contractual right to attorney fees when the action was voluntarily dismissed. The Supreme Court described that a main purpose for the enactment of section 1717 was "to ensure mutuality of remedy for attorney fee claims under contractual attorney fee provisions" in at least two distinct situations. (Santisas, supra, 17 Cal.4th at p. 610.) "The first situation in which section 1717 makes an otherwise unilateral right reciprocal, thereby ensuring mutuality of remedy, is 'when the contract provides the right to one party but not to the other.'" (Id. at pp. 610-611.) The second situation, relevant to the facts here, "is 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 either of these cases, a party prevailing cannot claim attorney fees based on the contractual language alone. With regard to the second situation, if section 1717 did not apply, "the right to attorney fees would be effectively unilateral—regardless of the reciprocal wording of the attorney fee provision allowing attorney fees to the prevailing attorney—because only the party seeking to affirm and enforce the agreement could invoke its attorney fee provision." (Santisas, supra, 17 Cal.4th at p. 611.) Instead, it has been consistently held based on the express language of section 1717 that "when a party litigant prevails in an action on a contract 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." (Santisas, supra, at p. 611.)
In Santisas, the defendants argued that even though they were not prevailing parties based on the statutory language of section 1717, subdivision (b)(2), they had an independent right to recover attorney fees based on the terms of the contract separate from and not affected by the terms of section 1717. The Supreme Court rejected that construction for two reasons.
First, it was inconsistent with the legislative intent behind section 1717 to "establish uniform treatment of fee recoveries in actions on contracts containing attorney fee provisions and to eliminate distinctions based on whether recovery was authorized by statute or by contract." (Santisas, supra, 17 Cal.4th at p. 616.) "A holding that in contract actions there is still a separate contractual right to recover fees that is not governed by section 1717 would be contrary to this legislative intent." (Ibid.)
Second, an independent contractual right to attorney fees would "defeat the underlying purpose of section 1717 to assure mutuality of remedy for attorney fees claims based on contractual attorney fee provisions." (Santisas, supra, 17 Cal.4th at p. 616.) If allowed, such an independent contractual right to attorney fees would be "governed entirely by contract law and would depend on whether the contractual attorney fee provision was unilateral or reciprocal." (Id. at p. 617.) "[T]his proposed construction of section 1717 would result in exactly the sort of one-sided enforcement of contractual attorney fee provisions that section 1717 was intended to preclude." (Ibid.) Having found that section 1717 should be interpreted to foreclose the right to enforce a separate contractual right to attorney fees, the terms of the statute "overrid[e] or nullify[] conflicting contractual provisions." (Santisas, supra, at p. 617, italics added.)
2. Appellate Decisions
In addition, appellate courts have reiterated that the terms of section 1717 control over the contractual language of the fees agreement. In Exxess Electronixx v. Heger Realty Corp. (1998) 64 Cal.App.4th 698, 702 (Exxess Electronixx), after a tenant voluntarily dismissed an action arising from a commercial lease dispute, the landlord moved for and was granted attorney fees based on the fees provision of the lease. The appellate court reversed the award of fees based on section 1717, subdivision (b)(2), which states there is no prevailing party or right to fees upon voluntary dismissal. (Exxess Electronixx, supra, at p. 707, citing Santisas, supra, 17 Cal.4th at p. 617.) The court explained that "section 1717 cannot be circumvented by seeking fees under the general cost provisions of the Code of Civil Procedure (Code Civ. Proc., § 1032-1033.5) or under section 1021 of the Code of Civil Procedure" nor from the terms of the lease that "contemplated an award of attorneys' fees [when] dismissed as a result of a settlement." (Exxess Electronixx, supra, at p. 707.) The court found the language of "Civil Code section 1717 is mandatory and cannot be altered or avoided by contract. [Citation.] Contractual provisions that conflict with the 'prevailing party' definition under section 1717 are void." (Ibid.)
Likewise, in Sears, the court explained that the terms of section 1717 have been interpreted broadly to encompass all contractual attorney fees provisions. "Throughout the course of the amendments to section 1717, the cases have suggested, and often presumed, an equitable application beyond mere reciprocity. We have found no case refusing to apply section 1717 where the operative agreement authorized attorney's fees to 'the prevailing party.'" (Sears, supra, 60 Cal.App.4th at p. 1148.) The court concluded that "several appellate courts, including the Supreme Court, have assumed the application of section 1717 has been broadened to include all contract actions which include provisions for attorney's fees." (Ibid., italics added.)
In Wong v. Thrifty Corp. (2002) 97 Cal.App.4th 261 (Wong), the court held that the language of section 1717, subdivision (b)(1), defining a prevailing party as "'the party who recovered a greater relief in the action on the contract'" "is mandatory and cannot be avoided or altered by contract; contractual provisions conflicting with it are void." (Wong, supra, at p. 264.) The court reasoned that "ruling that parties can contractually preclude fee awards when the action on the contract results in settlement as opposed to an adjudication of liability" would contravene the purpose and intent of section 1717 and "would relegate the right to recover fees solely to the arena of contract law, which would negate the fundamental purpose of the statute." (Wong, supra, at p. 265, italics added, fn. omitted.)
In ABF Capital Corp. v. Grove Properties Co. (2005) 126 Cal.App.4th 204 (ABF Capital), the parties entered into an agreement with a unilateral attorney fees provision in favor of the plaintiff. After the defendants succeeded in having the matter dismissed on demurrer, the trial court refused to find the terms of the attorney fees clause reciprocal, and denied the defendants' motion for fees. (Id. at pp. 210-211.) The Court of Appeal reversed, finding the language of section 1717, subdivision (a) controlled and required the fees clause to be reciprocal. It explained, "'This language is mandatory, unavoidable and emphatic. Section 1717[, subdivision ](a) is no default provision or gapfiller, subject to override by the parties. Rather, it represents a basic and fundamental policy choice by the state of California that nonreciprocal attorney's fees contractual provisions create reciprocal rights to such fees.'" (ABF Capital, supra, at p. 217, quoting Ribbens Internat., S.A. de C.V. v. Transport Internat. Pool, Inc. (C.D.Cal. 1999) 47 F.Supp.2d 1117, 1122.)
In Frog Creek Partners, LLC v. Vance Brown, Inc. (2012) 206 Cal.App.4th 515 (Frog Creek), the court was not persuaded by the argument that parties to a contract could provide for an attorney fees award in any specified circumstance, as long as the parties did so with highly specific contractual language. The trial court awarded each party attorney fees; the plaintiff was awarded fees for prevailing in its enforcement of an arbitration provision of the agreement and the defendant was awarded fees in light of the ultimate arbitration decision awarding it monetary damages. (Frog Creek, supra, at pp. 520-523.) The Court of Appeal reversed and found that neither prior case law nor the legislative history supports an interpretation of section 1717 allowing for multiple prevailing parties on one contract. (Frog Creek, supra, at p. 537.)
Relying on Santisas, supra, 17 Cal.4th at page 616 and Walker v. Ticor Title Co. of California (2012) 204 Cal.App.4th 363, 372-373 (Walker), the Frog Creek court found that under section 1717, parties to a contract could not "provide for an attorney fee award in any specified circumstance, as long as the parties did so with highly specific contractual language." (Frog Creek, supra, 206 Cal.App.4th at p. 544.) "[W]hile the availability of an award of contractual attorney fees is created by the contract [citation], the specific language of the contract does not necessarily govern the award. In setting contractual attorney fees, '"[e]quitable considerations [under ... section 1717] must prevail over ... the technical rules of contractual construction."'" (Walker, supra, at pp. 372-373, quoting International Industries, Inc. v. Olen, supra, 21 Cal.3d at p. 224.) When the contractual fees language conflicts with the statutory language, "section 1717 alone determines a party's entitlement to attorney fees under a contractual fee provision." (Frog Creek, supra, at p. 544.)
Federal courts have likewise concluded that, based on section 1717, "California has a fundamental policy against non-reciprocal attorney's fees clauses." (First Intercontinental Bank v. Ahn, supra, 798 F.3d at p. 1157.) "'California law requiring mutuality of attorneys' fees provisions reflects a strong public policy, overriding another strong public policy of freedom of contract.'" (Ibid.)
3. Conditions and Prerequisites
While the terms of section 1717 govern contractual attorney fees, courts have allowed parties the ability to place restrictions or conditions precedent on attorney fees provisions that do not conflict with the statute. In Leamon v. Krajkiewcz (2003) 107 Cal.App.4th 424 (Leamon), the court described how section 1717 allowed the parties to contract to restrictions that do not offend the terms or underlying public policies of section 1717. The court held that the phrase "'specifically provides'" in section 1717, subdivision (a), permits parties "to set forth with specificity the circumstances in which attorney fees are recoverable, provided any such specific contractual provisions do not otherwise conflict with the requirements of section 1717." (Leamon, supra, at p. 436.) "The public policies of establishing mutuality of remedy and eliminating one-sided attorney fees provisions are not necessarily served by construing section 1717 to void all contractual restrictions on attorney fees. Restrictions do not offend these public policies if they are mutual, do not favor one party over the other, and cannot be manipulated for tactical advantage in the litigation by one of the parties. Therefore, public policies underlying section 1717 would not be served by construing the phrase 'specifically provides' in a manner that imposes a blanket prohibition on all restrictions or conditions that might be contractually imposed on an award of attorney fees to a prevailing party." (Ibid.)
In Leamon, the court found the condition precedent of requiring the prevailing party to seek mediation to be eligible for an award of contractual attorney fees served the purposes of section 1717 as it was mutual and evenhandedly enforceable and, therefore, was a permissible restriction on the right to fees under section 1717. However, implicit in the court's reasoning was that the inverse would be true. Should a contractual term conflict with the terms or purposes of section 1717, those terms of the contract would be void and supplanted by the statutory requirements of section 1717. (Leamon, supra, 107 Cal.App.4th at p. 436.)
But before necessitating the overlay of statutory terms to the contract in this case, the court here could have interpreted the attorney fees provisions consistent with section 1717.
III. The Contractual Terms Should be Interpreted Consistently with Section 1717
The majority properly sets forth the first step of the analysis of contractual attorney fees. Under the American rule, each party to a lawsuit ordinarily pays its own attorney fees. (Tract 19051 Homeowners Assn. v. Kemp (2015) 60 Cal.4th 1135, 1142.) However, the American rule can be altered based on the significant authority of the parties to negotiate and contract to different fees arrangements. (See Code Civ. Proc., § 1021; Mountain Air, supra, 3 Cal.5th at p. 753.) The scope of the contractual fees agreement is determined using well-established contractual interpretation principles. (Mountain Air, supra, at p. 752.) However, contrary to the majority's reasoning that the right to contractual attorney fees "begins and ends with the language of the attorney fee clause" (see People ex rel. Dept. of Corporations v. Speedee Oil Change Systems, Inc. (2007) 147 Cal.App.4th 424, 429), after the terms of the contractual fees agreement are determined, the court must proceed to the next step and determine if the "agreement allocating attorney fees may be 'within the scope of ... section 1717' and subject to its restrictions." (Mountain Air, supra, at p. 752, quoting Santisas, supra, 17 Cal.4th at p. 617.)
"'"An appellate court is not bound by a construction of the contract based solely upon the terms of the written instrument without the aid of evidence [citations] ...."'" (City of Manhattan Beach v. Superior Court (1996) 13 Cal.4th 232, 238.) Further, a contractual provision "'"will be considered ambiguous when it is capable of two or more constructions, both of which are reasonable."'" (Powerine Oil Co., Inc. v. Superior Court (2005) 37 Cal.4th 377, 390-391.) "[A]mbiguities in written agreements are to be construed against their drafters. (Civ. Code, § 1654; Rest.2d Contracts, § 206.)" (Sandquist v. Lebo Automotive, Inc. (2016) 1 Cal.5th 233, 247.) Extrinsic evidence can be offered not only "'where it is obvious that a contract term is ambiguous, but also to expose a latent ambiguity.'" (Employers Reinsurance Co. v. Superior Court (2008) 161 Cal.App.4th 906, 920.)
There is no indication here that the trial court looked beyond the term "may" to determine that the attorney fees provision was discretionary. The parties did not express in the contract their intent as to the term "may" or the application of section 1717 and they presented no extrinsic evidence on the subject. The majority likewise relied only on the use of the term "may" to indicate the intent of the parties to enter into a permissive attorney fee provision outside the purview of section 1717. They did not consider that there is an alternative construction of the provision which is consistent with the terms and purposes of section 1717.
First, the parties' use of the term "may" is not inconsistent with the statutory scheme for awarding attorney fees under section 1717. The California Supreme Court has determined that "'[w]hen a party obtains a simple, unqualified victory by completely prevailing on or defeating all contract claims'" that party is entitled as a matter of law to be deemed a prevailing party and to recover reasonable attorney fees under section 1717. (Scott Co. v. Blount, Inc. (1999) 20 Cal.4th 1103, 1109.) But "when the results of the [contract] litigation are mixed," the trial court has discretion under the statute to determine that no party has prevailed. (Hsu v. Abbara, supra, 9 Cal.4th at p. 876.) As the court need not award fees when the results of litigation are mixed, the use of the term "may" is consistent with the court's discretion to award fees under section 1717.
As the language of the attorney fees agreement is susceptible of more than one meaning, the court can turn to extrinsic evidence. (Employers Reinsurance Co. v. Superior Court, supra, 161 Cal.App.4th at p. 920.) "Extrinsic evidence can include the surrounding circumstances under which the parties negotiated or entered into the contract; the object, nature and subject matter of the contract; and the subsequent conduct of the parties." (Cedars-Sinai Medical Center v. Shewry (2006) 137 Cal.App.4th 964, 980.) Here, although the parties did not present extrinsic evidence, there is a well-developed body of law surrounding the application of contractual attorney fees under section 1717 and it supports construing the contract consistent with the statute's terms. Interpreting the contract to circumvent section 1717 would significantly alter the public's rights and expectations in connection with awarding attorney fees to enforce a contract. Under these circumstances, it is questionable whether the trial court's and the majority's construction of the fees provision is reasonable.
Second, the City of Dinuba (City) drafted the lease, and is now arguing the use of the term "may" should be construed in its favor so that Biopharma will not be entitled to attorney fees as a matter of right. However, any ambiguity in the term "may" must be construed against City, as the party that drafted the lease.
In the end, however, even if the parties in fact intended to circumvent the reach of section 1717, the terms of the statute would still control, as described below.
IV. Section 1717 Overrides Conflicting Contractual Language
No other case has addressed whether the use of a permissive fees provision would avoid the application of section 1717. Assuming for the sake of analysis that the parties intended for "may" to mean that section 1717 is not invoked, the above cases make clear that like all other contractual provisions that conflict with the terms of section 1717, the permissive term "may" should be considered void and replaced with the statutory terms required by section 1717. A separate right to contractual attorney fees would contradict the legislative intent to "establish uniform treatment of fee recoveries in actions on contracts containing attorney fee provisions." (Santisas, supra, 17 Cal.4th at p. 616.) While the Supreme Court in Santisas supplanted the contract terms with the provisions of section 1717, subdivision (b)(2), the same reasoning would dictate similar results in supplanting with the provisions of section 1717, subdivision (a).
Here, the lease agreement was between City and Universal, Inc. The jury found Biopharma was not a party to the lease agreement and, therefore, the lease was unenforceable and Biopharma was not liable. Section 1717 permits a party to recover attorney fees when it prevails in an action on a contract "by establishing that the contract is invalid, inapplicable, unenforceable, or nonexistent" if the "opposing parties would have been entitled to attorney fees under the contract had they prevailed." (Santisas, supra, 17 Cal.4th at p. 611; see Civ. Code, § 1717, subd. (a) [fees are awarded to the "party prevailing on the contract, whether he or she is the party specified in the contract or not"].) The majority affirms the trial court's holding that Biopharma was eligible for an award of attorney fees, not based on section 1717, but instead on an independent contractual right to fees arising from the parties' right to contract under Code of Civil Procedure section 1021.
At trial, City argued that Biopharma was not entitled to contractual attorney fees on grounds that there was no privity of contract between City and Biopharma. The trial court relied on the case of Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124 as authority for extending to Biopharma, as a nonparty, the right to recover attorney fees as the prevailing party, but then exercised its discretion to deny it an award of fees. Reynolds Metals Co., however, is predicated on section 1717 which, as discussed above, expressly authorizes fees to nonparties in certain circumstances. (Reynolds Metals Co., supra, at p]. 128-129.) Hence, both the trial court and majority extended the right to attorney fees to Biopharma despite the fact that there was no legal basis to do so absent application of section 1717. "Where a plaintiff claims breach of a contract containing an attorney fee provision and the defendant asserts there is no contract and wins, it will have established that there is no contract and, hence, no attorney fee provision." (M. Perez Co., Inc. v. Base Camp Condominiums Assn. No. One (2003) 111 Cal.App.4th 456, 467.) The Supreme Court has explicitly stated that "in this situation, the right to attorney fees would be effectively unilateral—regardless of the reciprocal wording of the attorney fee provision allowing attorney fees to the prevailing attorney—because only the party seeking to affirm and enforce the agreement could invoke its attorney fee provision." (Santisas, supra, 17 Cal.4th at p. 611.)
The majority found a contractual right to attorney fees where one did not exist. Without the application of section 1717, Biopharma has no legal right to attorney fees. This result is "exactly the sort of one-sided enforcement of contractual attorney fee provisions that section 1717 was intended to preclude." (Santisas, supra, 17 Cal.4th at p. 617.) The majority's contention that any public policy concerns surrounding attorney fees clauses outside section 1717 have been alleviated in this case because the contract was drafted to be bilateral is erroneous.
V. Conclusion
It is evident that, with respect to attorney fees provisions to enforce the contract, the Legislature did not intend to "relegate the right to recover fees solely to the arena of contract law." (Wong, supra, 97 Cal.App.4th at p. 265.) If so relegated, there is no reason why future parties would be required to enter into bilateral fees arrangements, and could instead contract to unilateral discretionary fees provisions. If allowed, none of the safeguards of section 1717, in addition to reciprocity, awarding fees to parties not specified in the contract when the contract is unenforceable as to them (§ 1717, subd. (a)), not subjecting attorney fees to waiver (ibid.), fixing reasonable attorney fees as costs of suit (ibid.), defining prevailing party (id., subd. (b)(1)), and not providing fees if a matter is voluntarily dismissed (id., subd. (b)(2)) would apply to this separate contractual right to fees. Instead, litigants and judges would be required to navigate how attorney fees provisions should be enforced without the benefit of the statutory terms of section 1717 and the extensive body of case law that they have come to rely upon as intended.
Although the trial court in good faith endeavored to accommodate the parties' request to determine whether fees should be awarded on a discretionary basis, it nonetheless erred in either not construing the provision consistent with the statute or modifying the conflicting language of the fees provision to comport with the terms of section 1717. The trial court found that Biopharma was the clear prevailing party. As such, Biopharma was entitled to attorney fees as a matter of right. The majority should have remanded so the trial court may exercise its discretion in fixing reasonable fees in accordance with section 1717.
/s/_________
MEEHAN, J.