Who Pays Attorney’s Fees?

By Ronald R. Rossi

May 23rd, 2017

One of the questions clients ask most frequently is "If I win, does the other side have to pay my attorney's fees?" Or, conversely, "If I lose, do I have to pay the other side's attorney's fees?"

Whether or not the party that wins is able to recoup all or part of its attorney's fees is one of the most significant issues in real estate and business litigation. Attorney's fees associated with litigation can be astronomical - nowadays, they can easily match or exceed the amount of damages at issue.

In England, attorney's fees are typically awarded to the party that wins. The colonists, however, wanted to adopt a different rule -the so-called American Rule, where each party pays its own attorney's fees unless there is some specific exception or there is a contract providing that the prevailing party will recover its attorney's fees. For example, the California Association of Realtors (C.A.R.) Purchase Contract has the following attorney's fees clause:

"In any action, proceeding, or arbitration between Buyer and Seller arising out of this Agreement, the prevailing Buyer or Seller shall be entitled to reasonable attorney fees and costs from the non-prevailing Buyer or Seller ..."

The first step any lawyer should take is to analyze the attorney's fees clause and explain to the client who will pay the fees, win or lose. The C.A.R. contract provides that if there is a lawsuit or arbitration between the buyer and seller, the party that wins obtains its attorney's fees. It does not mention, however, any real estate agents or brokers involved in the transaction.

After close of escrow, the typical dispute we see involves a buyer making a claim against a seller for nondisclosure of critical items in the purchase. Whether it be an apartment house, office building, industrial site, or a single-family home, if the buyer sues the seller utilizing provisions such as the one quoted above and the buyer wins, the buyer may petition the court or arbitrator for reimbursement of attorney's fees incurred by the buyer's attorney. Conversely, if the buyer loses, the seller may petition the court or arbitrator for their attorney's fees. Obviously, the party that loses bears a substantial risk of paying not only their own attorney's fees but also the fees incurred by the other party. This is a critical issue to analyze when deciding whether to file or defend a lawsuit. With the American Rule, there has to be a contract for the prevailing party to obtain their attorney's fees, or each party bears its own. (There are certain exceptions to this rule, but those are topics for another article.)

The next issue - who is the prevailing party?

When one party is deemed the "prevailing party," that does not necessarily mean that the party wins on every theory. Partial success may justify an award for attorney's fees. Typically, the damage law considers the party that wins an award for damages against a defendant the prevailing party. (Things become more complicated when there are cross-complaints.) An award for attorney's fees does not necessarily have to be proportionate to the amount of damages obtained. Again, depending on the facts of each case and the magnitude of what was achieved, courts often will award attorney's fees totally out of proportion to the amount of damages sustained.

In cases where there is no prevailing-party attorney fee clause or other statutory exception and the American Rule applies, victory may be hollow. For example, some years ago, I had a case against a major homebuilder. Generally, homebuilders do not have provisions for prevailing-party attorney's fees. In our case, however, the homebuilder used the wrong roof on the tract home our client bought. The entire roof had to be removed and a new roof installed, at a cost of approximately $75,000. For settlement purposes, the builder admitted that it put on the wrong roof, but it argued that the attorney's fees incurred in pursuing the claim, if the plaintiff won, would easily reach $75,000. Accepting the builder's logic, it would be foolhardy to spend $75,000 to obtain damages for $75,000, even if the case was a 75% winner. That would just not make good business sense.

Parties in litigation and their attorneys often lose sight of the attorney fee principle.

Clients often ask another question - "if we settle the case, will I get my attorney's fees?" In my experience, in the vast majority of cases when a settlement does occur, it is very, very difficult to get the other side to pay anything towards the claimant's attorney's fees. It just does not work. Mediators consistently have to tell claimants "they are not going to pay your attorney's fees - they will pay your damages, but not your fees." Normally, to obtain attorney's fees, one has to go all the way through the case. If it is a binding arbitration, which we frequently see, one has to go through the arbitration, win the case, and then petition the arbitrator for fees. The arbitrator then looks at the fees in the context of a separate motion, the other side gets to see those fees and attack them on the grounds that they may be unnecessary or unreasonable, and then the arbitrator makes a decision. Of course, even if the arbitrator awards fees, they still have to be collected from the party who is ordered to pay them.

The facts and the law concerning prevailing-party attorney's fees, who pays the fees, and how to recoup them should be discussed very early on with every client. I have seen hundreds of cases in which attorneys have proceeded on a very small claim and run up thousands of dollars in attorney's fees only to find out that the judge will not award those fees because they are unreasonable in light of the circumstances of the case. Each situation is different, however, and analyzing all the possibilities for the client is the best way to prepare for what may occur in that client's particular case.

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