This Supreme Court case came up recently in the Monster case. Like Montser, it deals with whether a prevailing party can get attorneys’ fees when the contract with the fee provision in it was the basis of an affirmative defense.
The facts are really complicated, so I’ll take some liberties and oversimplify a little. A and B are parties to contract #1 requiring B to buy a building from A. Affiliates of A and B are also parties to a later contract #2, which gives B an option to buy the same building from A. Both contracts have attorney fee provisions. B doesn’t buy the building, in violation of contract #1. A sues B, for breach of contract #1.
After a bench trial, the trial court rules for B. The trial court finds that contract #1 was void and illegal based on some real estate laws, and also that contract #2 novated contract #1. B then seeks to recover its attorney fees under both contracts, but the trial court denies the motion. It held that fees couldn’t be recovered under the provision in void contact #1. And contract #2’s fee clause only permitted a recovery for a lawsuit brought to enforce contract #2; it did not reach a claim where contract #2 was used as a defense to enforcement of contract #1. The Court of Appeal reversed on the second issue back in 2014, and the Supreme Court granted review based on a split of authority.
The issue comes down to a question of the interpretation of the fee provision in contract #2. It says:
Litigation Costs. If any legal action or any other proceeding, including arbitration or an action for declaratory relief[,] is 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 prevailing party shall be entitled to recover reasonable attorney fees, expert fees and other costs incurred in that action or proceeding, in addition to any other relief to which the prevailing party may be entitled.In a 4-3 majority opinion, written by Justice Chin and joined by the Chief and Justices Werdegar and Cuellar, the court splits the clause into two parts at the second “or.” There isn’t really a dispute over whether the litigation itself is not a “any legal action or any other proceeding . . . for the enforcement of this Agreement.” Given that the claims are based on contract #1, not contract #2, it’s just not. The question is whether an affirmative defense based on contract #2 being a novation meets the test. After some parsing of the meaning of the terms “action” and “proceeding,” the court says it doesn’t. While an “action” and a “proceeding” can include the assertion of affirmative defense, the defenses themselves do not constitute an action or proceeding.
But the majority finds the second part of the clause—permitting fee recovery in “any legal action . . . brought . . . because of an alleged dispute, breach, default, or misrepresentation in connection with any provision of this Agreement”—does apply to the assertion of contract #2 as a novation. No doubt, the litigation itself is an action. And the interpretation of contract #2’s integration clause was part of the defense in that action. So, according to the majority, by bringing a litigation where the integration cause in contract #2 was a viable defense, A brought an “action” where a provision of the agreement was in dispute.
The rub comes down to “because of.” Clearly A’s suit to enforce contract #1 wasn’t brought “because of” any of the terms of contract #2. But the court declines to construe “because of” in so limited a fashion. It basically reads “because of” to require only a causal link of some sort, which basically renders the term to mean something like “necessarily implicating.” And because there was no way to adjudicate the case without interpreting contract #2, that standard was met here.
Justice Kruger concurs and dissents, joined by Justices Liu and Corrigan. She agrees that an affirmative defense isn’t an “action” or “proceeding.” But she thinks the majority is being too loosey goosey with the “because of” clause and ignores the word “alleged.” In this case, A neither alleged anything about contract #2 nor brought its case “because of” that contract or its provisions. If the parties wanted “because of” to mean “implicating” they could have put those words into the contract. But they didn’t, and the court shouldn’t do it for them after the fact.
Court of Appeal affirmed.
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