Fee Clause Interpretation and 998 Offers: Court Of Appeal Remands $400,000 Fee Award against Contractor But Affirms Separate $296,148.84 Against Contractor In Favor of Subcontractor

Fourth District, Division 1 Address Plethora of Fee Issues in Unpublished Decision.

     Well, strap your helmets on, readers, because we now synopsize a 75-page unpublished decisions dealing with a cornucopia (a good word in celebration of upcoming Thanksgiving) of attorney’s fees issues under California law.

     In The Gifted Schools v. Grahovac Construction Co., Case No. GIC840032 (4^th Dist., Div. 1 Nov. 19, 2009) (unpublished), plaintiffs Trust and an associated Corporation received an aggregate award of $438,610 against defendant Contractor as well as a Civil Code section 1717 attorney’s fees award of $400,000 to both “Plaintiffs” (out of submitted bills totaling $772,001). Earlier, plaintiffs had rejected a substantial, higher 998 offer of $605,000 made by Contractors jointly to “Plaintiffs.” Contractor also lost his cross-complaint against subcontractor, which was awarded fees of $296,148.84 under section 1717. Everyone appealed except subcontractor.

 

     In a 3-0 panel decision authored by Acting Presiding Justice Huffman, the appellate court affirmed the subcontractor fee award, reversed the fee award in favor of plaintiff Corporation, reversed the denial of a fee award in favor of Contractor as against Corporation, and remanded for a recalculation of the proper fees due to plaintiff Trust.

     Contractor argued that no fees were allowable to plaintiffs based on its rejected Code of Civil Procedure 998 offer. Wrong, said the Court of Appeal. The 998 offer was invalid because it was made to “Plaintiffs,” which did not have the kind of unity of interest that would have justified a joint offer. (Peterson v. John Crane, Inc., 154 Cal.App.4^th 498, 505-507 (2007).) Also, the 998 offer was conditioned on waiving nonmonetary or future claims such that it was too vague to truly evaluate.

     With respect to the fee award in favor of plaintiffs and against Contractor, the fees clause was quite narrow, applying only to “any action brought to enforce or interpret the provisions of [the] agreement.” (This limitation to contract enforcement or contract interpretation, rather than resolution of “any dispute” that “might arise” from the agreement, was key to the court’s end result in this case.) Plaintiff Trust was entitled to fees because it did recover significant contract damages, albeit less than claimed. However, the appellate court could not conclude why plaintiff Corporation was included in the fee award given that it was not a contractual signatory and only recovered damages on a negligence claim. Beyond that, the fees clause was narrow, not applying to broader disputes (such as negligence) that might arise out of the contract—this difference meant it was error to include the Corporation in the prevailing party attorney’s fees award. The Court of Appeal also determined that third party beneficiary analysis in nonsignatory cases was unavailing to Corporation, given that there was not a close enough connection between Corporation (a tenant) as a potential third party beneficiary of the owner’s contract and the Contractor and also given that Corporation only recovered on a negligence claim. (See Real Property Services Corp. v. City of Pasadena, 25 Cal.App.4^th 375 (1994).)

     However, Contractor was found to the successful prevailing party on the contract claims brought by the Corporation. Because Corporation would have been entitled to fees as a third party beneficiary on the contract claim, Contractor was entitled to fee recovery. The Court of Appeal was concerned that any other interpretation of the clause would result in the Corporation being able to assert a “heads I win, tails you lose” position on fee recovery under a third party beneficiary theory, while otherwise being able to claim nonparty status as well as overall prevailing party on the tort theories so as to resist being liable for attorney fee assessments. (BLOG OBSERVATIONS—Who says equity does not factor into appellate decisions? Not us.)

     Justice Huffman, on behalf of the panel, was disturbed by the trial court’s failure to apportion fees among claims. It found that the failure to apportion was an abuse of discretion because there was no apportionment of fees to represent the success of plaintiff Trust on the contract but the lack of success of the Corporation on the contract. Thus, on remand, fees spent in representation of the Corporation had to be excluded for recalculation purposes.

     The subcontractor fee award was not difficult to uphold, according to the appellate court, because Contractor never appealed the jury verdict exonerating the subcontractor. The bases for the fees award were fully vetted at the fee hearing.