California Supreme Court Issues Critical Opinion Regarding Structure and Language of Contractual Attorneys' Fees Provisions
The California Supreme Court recently issued its opinion in Mountain Air Enterprises v. Sundowner Towers, addressing a simple but important question regarding attorneys' fees provisions in commercial contracts: If a contract provides for an attorneys' fees award to a prevailing party in an "action or proceeding" to enforce or interpret the contract, can a defendant obtain fees if it uses the contract solely as part of an affirmative defense to the plaintiff's claim? The Court answered "maybe," depending on the language of the provision and the facts of the case, making it critical for attorneys' fees clauses to include appropriate language if the parties want to cover this situation.
Dispute Arose Over Real Estate Purchase Agreements
Mountain Air involved a complex transaction for the purchase of real property in Reno, Nevada. In short, in 2005, the parties entered into a purchase agreement, in which Sundowner agreed to sell the property to Mountain Air, and a repurchase agreement, in which Sundowner agreed to repurchase the property at a specified date for an agreed price, plus a 12% "inflation factor." In 2006, the parties entered into an option agreement, providing Sundowner an option to purchase (or repurchase) the property. After Sundowner transferred the property to Mountain Air under the purchase agreement, Mountain Air sued Sundowner for failing to repurchase the property under the repurchase agreement.
Sundowner successfully defended Mountain Air's claims using two arguments: first, the repurchase agreement was illegal and void; and second, the option agreement superseded and cancelled its obligations under the repurchase agreement. Sundowner sought to recover its attorneys' fees expended in the action under contractual provisions in both agreements.
Court of Appeal Held Fees Could Be Awarded
As to the repurchase agreement, the trial court and the Court of Appeal agreed the clause did not apply because the agreement was void. Reversing the trial court, however, the Court of Appeal held that fees could be awarded under the option agreement, which provided for an award of fees to the prevailing party "in any legal action, or any other proceeding, including arbitration or an action for declaratory relief . . . brought for the enforcement of this agreement or because of an alleged dispute, breach, default, or misrepresentation in connection with any provision of this agreement." The Court of Appeal, following a recent Second District opinion in Windsor Pacific LLC v. Samwood Co. (2013) 213 Cal.App.4th 263, and disagreeing with decisions in two earlier cases, held that an affirmative defense based on a contract was included in an "action" or "proceeding" to enforce the contract. Therefore, Sundowner's affirmative defense based on the option agreement triggered the clause.
California Supreme Court Disagrees With Court of Appeal
The California Supreme Court affirmed the result but disagreed with the Court of Appeal on this critical point. All seven justices in Mountain Air agreed that an affirmative defense is not an "action" or "proceeding," or part of an "action" or "proceeding," sufficient to trigger an attorneys' fees provision written in a form similar to the one at issue. Therefore, Sundowner's defense was not a "legal action or other proceeding . . . to enforce" the option agreement. Instead, in a 4-3 decision, the Court held that under the second portion of the clause, the action brought by Mountain Air was "because of . . . an alleged dispute" over the terms of the option agreement, even though not expressly based on that agreement, thus permitting Sundowner to recover fees.
Implications of Mountain Air
The holding of Mountain Air is critical to the structure and language of attorneys' fees clauses in California. If a party uses a contract solely in defense -- for example, using a contractual release as a defense to a tort claim -- California law does not permit an attorneys' fees award to the defendant if the clause only covers an "action or proceeding to enforce" the contract, or any similar language. To ensure that a contractual attorneys' fees provision will cover this situation, the clause must show explicit intent to include affirmative defenses based on the parties' rights in the contract.