Tuesday, May 29, 2012
Court of Appeal Clarifies Rule on Attorney Fees in Contract Dispute
Fight Over Arbitration Not a Separate Proceeding Under Sec. 1717, Justices Say
By KENNETH OFGANG, Staff Writer
A contractor which lost a bid to compel arbitration of its dispute with a property owner, but later prevailed in connection with the dispute as a whole, was entitled to attorney fees for the entirety of the proceedings, including the unsuccessful arbitration petition, the First District Court of Appeal has ruled.
Div. Five Thursday overturned an order requiring Vance Brown, Inc. to pay $125,000 to a company formed by venture capitalist Jeffrey Drazan to manage the construction of his multimillion dollar home in Woodside, a rustic community in San Mateo County. The panel also ruled that Brown was entitled to attorney fees it expended in litigating the arbitration issue, and on appeal.
“In particular, we hold that, under Civil Code section 1717, there may only be one prevailing party entitled to attorney fees on a given contract in a given lawsuit,” Justice Mark Simons wrote. “On that basis, we reverse the trial court’s fee award, which awarded attorney fees to both parties on the same contract in the same lawsuit.
Drazan—the managing director of Sierra Ventures—and Frog Creek Partners, LLC, which he formed specifically to get the house built—hired Vance Brown in 2002. The ultimate cost of the house, according to a local newspaper report, was $18 million.
The parties agreed that Brown would start work in September 2002, even though there was no written contract at that time. A number of drafts were exchanged, and the appellate panel noted that there was no one copy signed by both parties in the record.
Frog Creek eventually sued for breach of contract, attaching one version of the contract to its complaint. Brown responded by filing a petition to compel arbitration, based on an arbitration clause in one version of the contract.
The petition did not contain a full contract, only a portion containing the purported agreement to arbitrate. Ultimately, Brown produced a version of the contract signed only by its president, and the trial judge denied the petition.
The Court of Appeal affirmed, on the ground that the evidence did not establish that Frog Creek had agreed to arbitrate, but left the door open to the filing of an amended petition. Brown then filed such a petition, arguing that the version of the contract prepared and signed by Frog Creek also contained an arbitration clause, which Brown argued was binding.
Frog Creek argued that the amended petition was an improper motion for reconsideration, that there was no valid agreement to arbitrate, and that the agreement was unconscionable. The judge denied the amended petition, but this time the Court of Appeal reversed and ordered arbitration.
The arbitration took 50 days. An American Arbitration Association panel found that Frog Creek breached the contract by making an excessive number of change orders and refusing to pay the related costs, and awarded more than $1.9 million in damages, more than $2.5 million in attorney fees for the arbitration proceedings, and more than $666,000 in costs.
The panel declined to rule on whether either party might be entitled to attorney fees and costs for litigation activity before the arbitration. Brown then asked the San Mateo Superior Court to award it nearly $1 million in fees and costs incurred before and after arbitration, and Frog Creek asked for nearly $230,000 in fees and costs related to the litigation over the first petition to compel arbitration.
Superior Court Judge Rosemary Pfeiffer ruled that Frog Creek was the “prevailing party” with respect to the first petition, and that $125,000 was a reasonable sum for that portion of the litigation, including the first appeal. The judge then awarded Brown more than $692,000 in pre-arbitration fees and $96,000 in post-arbitration fees based on the amended petition, leaving the contractor with a net of more than $663,000 in attorney fees awarded for proceedings in the trial and appellate courts.
But by treating the petitions to compel arbitration as distinct proceedings, rather than as part of the overall breach-of-contract dispute, the trial judge misconstrued Sec. 1717, Simons wrote.
He noted that the current version of the statute provides for an award of fees to “the party prevailing on the contract,” rather than simply “the prevailing party,” as the law read originally, and that the party prevailing on the contract is defined to be “the party who recovered a greater relief in the action on the contract.”
Simons concluded that Benjamin, Weill & Mazer v. Kors (2011) 195 Cal.App.4th 40 was wrongly decided to the extent it allowed an attorney fee award solely for enforcing an arbitration clause. The issue in that case was whether an attorney fee dispute should have been arbitrated before a Bar Association of San Francisco panel, or before an arbitrator or panel subject to the Ethics Standards for Neutral Arbitrators in Contractual Arbitration, as the Court of Appeal ruled.
None of the cases cited by the Kors court, the justice noted, involved issues apart from arbitrability. “In contrast, the petition to compel arbitration in Kors was filed within the lawsuit brought by BWM, and, like Frog Creek’s victory here, Kors’s victory on the arbitration petition did not resolve the underlying suit.”
Cases in other contexts, the jurist said, are consistent with the principle that Sec. 1717 allows only one prevailing party on a contract.
The case is Frog Creek Partner, LLC v. Vance Brown, Inc., 12 S.O.S. 2550.
Copyright 2012, Metropolitan News Company