On December 15, 2017, the Court of Appeal of the State of California, First Appellate District, in California-American Water Company v. Marina Coast Water District, et al., affirmed the trial court’s order requiring defendants to pay contractual attorney fees incurred by plaintiff, despite the fact that the subject contracts between the parties were deemed void. Although this decision does not represent a change in the law, the argument that a voided contract should not allow for the recovery of attorney’s fees is commonly raised by the losing party every time an opposing party successfully voids a contract that includes a prevailing party attorney fees provision.

In the California-American case, the parties, California-American Water Company (“California-American”), Marina Coast Water District (“Marina”), and Monterey County Water Resources Agency (“Monterey”), which are public water agencies, entered into several contracts to collaborate on a water desalination project. As part of their contracts, the parties agreed that the prevailing party of “any action or proceeding in any way arising from [their a]greement” would be entitled to an award of attorney fees and costs. After learning that a member of Monterey’s board of directors had a conflict of interest, plaintiff California-American filed a lawsuit and was successful in having the contracts declared void under Government Code section 1090. While Monterey agreed that the contracts were void, Marina did not. As part of the trial court’s decision to declare the contracts void, California-American was also awarded attorney’s fees and costs under Code of Civil Procedure section 1032 and 1717, pursuant to the prevailing party attorney fees provision contained in the subject agreements.

Marina appealed the trial court’s award of attorney’s fees, contending that section 1717 only authorizes a fees award in cases involving an “action on a contract,” and that this case is not such an action because the contracts at issue were declared void ab initio. The question of how can an attorney fees provision in a contract govern the parties’ fees obligations when the contract itself is deemed to have been void from its inception, is an argument that the Court admits to having “some intuitive appeal”, it is also one that the Court holds is “ultimately unpersuasive for the reasons explained by the Supreme Court in Santisas v. Goodin (1998) 17 Cal.4th 599 (Santisas).”

In Santisas, the Court discussed that “[t]he primary purpose of section 1717 is to ensure mutuality of remedy for attorney fee claims under contractual attorney fee provisions,” and explained that the section safeguards mutuality of remedy “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.’” The Santisas Court noted that if only the party seeking to affirm and enforce the agreement could invoke its attorney fee provision “the right to attorney fees would be effectively unilateral,” and to avoid such a unilateral right and to ensure mutuality of remedy, “it has been consistently held 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 the party’s recovery of attorney fees whenever the opposing parties would have been entitled to attorney fees under the contract had they prevailed.”

In making its decision the Court relied heavily on the Santisas Court decision, stating that “Santisas was unequivocal in holding that a party can be entitled to attorney fees under section 1717 even when the contract at issue is adjudged to be inapplicable, invalid, unenforceable, or even nonexistent.” The Court noted that if Marina had prevailed it would no doubt have been entitled to an award of its fees, but California-American and Monterey prevailed. Thus, the Court held that under mutuality principles they have “a right to claim [their] attorney fees.”

CONCLUSION: The entitlement to attorney fees under Section 1717 arises because of the section’s purpose of protecting the parties’ “mutuality of remedy,” and “[u]nder that doctrine, if the party would have been exposed to fees had the court found against it, then that party is entitled to fees for prevailing,” even if doing so voids the subject contract. Attorneys who represent parties trying to have a contract upheld or deemed valid, which contain a prevailing party attorney fees provision, should be aware that if the other side succeeds in having the contract declared void, they could have their cake and eat it too, by also collecting prevailing party attorney’s fees.

-By Pierre B. Pine