Of Walnut Trees and Attorney Fees

Two interesting and “bloggable” issues are raised and decided by the Third District Court of Appeal in Brittalia Ventures v. Stuke Nursery Co., Inc., case no. C0478374 (July 10, 2007).  One regards the proper standard of review when the terms of a contract are disputed.  The second, and more interesting, concerns post-trial motions for attorney fees.

Brittalia purchased walnut trees from Stuke and later sued for breach of warranty and other causes of action based on allegations that many of the trees were either the wrong variety or diseased.  There was no single, clearly identified written contract governing the sale.  The parties had a course of dealing during which they had agreed to a transaction, then canceled it, then agreed to a new transaction.  The documents (order confirmation, invoice) memorializing the canceled transaction contained warranty disclaimers and an attorney fee provision.  The documents memorializing the completed transaction (purchase proposal and check for down payment and 529 plans) did not.  The jury rendered a general verdict for Brittalia for $5.4 million, and the court awarded Brittalia $750,000 in attorney fees.  Stuke appealed the judgment and fee award . . .

The Standard of Review.

The Court of Appeal is very careful to identify the contract question at issue in order to arrive at the correct standard of review.  The issue is not one of law for the court because the issue is not what the contract means.  The issue is what the contract is. That is, does the contract include the earlier documents as well as the later ones?  That issue is a hotly disputed factual issue, thus subject to substantial evidence review.  The court affirms the judgment because substantial evidence supports the jury’s implicit finding that the warranty disclaimer in the documents regarding the canceled transaction was not a term of the completed transaction.

Availability of Attorney Fees.

Here’s the really interesting part of the opinion . . .  

If the terms in the earlier documents don’t apply to the completed transaction, then the attorney fee provision cannot be a term of the sale any more than the warranty disclaimer can.  Thus is posed the issue: If the plaintiff asserts that the contract terms do not include a fee provision and the defendant claims that the terms do include a fee provision, does the mutuality requirement of Civil Code section 1717 entitle the prevailing plaintiff to recover fees?

I thought Brittalia had a decent argument it should recover its fees.  After all, section 1717 has long been construed to require mutuality, even when a defendant successfully defends against a contract with a fee provision by proving the contract is unenforceable.  The logic behind that rule is simple: the defendant in such a case must be able to recover fees because allowing only a successful party seeking enforcement of the agreement to recover fees effectively renders the fee provision unilateral in violation of Civil Code section 1717.

Here, the court sees the situation somewhat differently, and rejects Brittalia’s claim that it should be awarded fees.  Because Brittalia did not allege that the contract it sued upon contained a fee provision and Stuke argued that terms from a contract different from the one sued upon included the fee provision, the court concludes “there simply was no ‘mutuality’ of attorney fee remedy that Stuke could have invoked to obtain its attorney fees under section 1717.”

Did the court get it right?  Its reasoning appears vulnerable for a couple of reasons.

First, Stuke wasn’t really arguing that the terms of a different contract applied.  Stuke argued that the earlier documents were part of a course of dealing that made the earlier documents part of the same contract, covering the  same transaction, over which Brittalia was suing.  The parties disagreed about what terms were included.

Second, while it is true that Stuke couldn’t invoke mutuality because Brittalia didn’t assert that the operative terms included a fee provision, why should mutuality only apply when a plaintiff claims a fee provision is in the contract and not when a defendant does so?

Perhaps the answer lies in the court’s final consideration: equity.  The court finds that it would be inequitable to allow Brittalia to recover fees when it asserted that the contract didn’t include a fee provision:

It simply is unfair to award Brittalia its attorney fees under section 1717. Brittalia cannot be allowed to win on its contract action by championing one contract without an attorney fee provision, and then turn around and ask for attorney fees as prevailing party based on a different contract, with an attorney fee provision, that Brittalia had to defeat to secure its victory.

But this reasoning likewise seems flawed.  If the court’s characterization of the documents as two different contracts is based on the implicit jury finding, then the court’s holding seems to produce exactly what Civil Code section 1717 prohibits: a unilateral fee provision.  Because Brittalia won on a contract it insisted did not provide for fees, it was not entitled to them.  But had Stuke won because the jury decided that the warranty disclaimer applied, the attorney fee provision would have likewise applied, and Stuke presumably would have been entitled to its fees.

My analysis in the preceding paragraph presumes, of course — as did Brittalia’s argument — that Stuke would have been entitled to recover fees had it prevailed by proving that the warranty disclaimer (and thus the fee provision as well) was part of the contract.  Oddly, though, the court never answers this question.  Perhaps that is why it does not see the lack of mutuality in its holding — it presumes, but never tells us, that Stuke could not have recovered its fees, either.

Let’s look at the pertinent postion of Civil Code section 1717 (emphasis added):

In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.

The emphasized language is pretty tough to get around.  Had Stuke stated an affirmative claim based on including the warranty and fee provisions in the contract, it’s hard to see how section 1717 wouldn’t apply.

One effect of the decision is that it appears to place the power of deciding whether fees are at stake solely in the hands of the party seeking enforcement.  That may be in line with the intent of the staute, which addresses provisions awarding fees “which are incurred to enforce that contract.” 

Here, Brittalia initially defined the scope of what it contended was the contract and sought to enforce it.  But suppose instead that Stuke had sued for nonpayment and asserted the contract terms encompassed the fee provision in the earlier documents.  Wouldn’t that require a fee award to Brittalia if Britallia established that the fee provision was inapplicable?  What if Stuke had filed a crossclaim for breach of contract, making the same assertion?

I wonder whether Brittalia’s lawyers formed a strong opinion early in the case that Brittalia would be entitled to fees if it prevailed, or if they merely saw an opening at the end of the case.  It’s hard for me to belive they didn’t consider it early and repeatedly, especially with a case so expensive to litigate.  Were they shocked by the result?

This area of the law is just not as simple as Section 1717 might lead one to believe.  Trial counsel must very carefully evaluate whether their clients will be able to recover — or may be liable for — attorney fees at the end of the case.  They may have a hard time forming a concrete opinion.