1717 Reciprocity Principles Save the Day Again, Sustaining $366,916.63 Fee Award.
Many construction disputes involve tripartite affairs between owner, contractor, and surety on a performance bond. That was exactly the situation in the next case, with a performance bond having a fee provision that said this: "Contractor/Principal and Surety agree that if the DISTRICT [owner] is required to engage the services of an attorney in connection with the enforcement of this bond, each shall pay DISTRICT’s reasonable attorneys’ fees and costs incurred, with or without suit, in addition to the above amount [penal sum equal to the value of the Contract between DISTRICT and Contractor/Principal]."
What happened is that contractor won litigation over a school modernization project brought by it to recover fees owed under a construction contract with school district, which in turn brought a cross-complaint on the performance bond against contractor—with the performance bond having the fees clause quoted above. Contractor won across the board, obtaining a compensatory award and interest of about $870,500, plus $366,916.63 in attorney’s fees and $208,650.26 in costs. School district appealed both the merits and fee judgments.
The Fourth District, Division 1, in a detailed 73-page slip opinion, affirmed in Mepco Services, Inc. v. Saddleback Valley Unified School District, Case No. D055018 (4th Dist., Div. 1 Nov. 2, 2010) (certified for partial publication, fee discussion published).
Although the construction contract did not contain a fees clause, the performance bond did, which was the subject to school district’s cross-complaint under which it did not prevail. The fees clause was unilateral in nature, but Civil Code section 1717 operated to make it reciprocal in nature. Relying on Leatherby Ins. Co. v. City of Tustin, 76 Cal.App.3d 678, 690 (1977), the appellate court determined that section 1717 could transform a bond’s unilateral fee provision into a provision that permitted the bond principal or surety to recover fees in an action on the bond. So, what about recovery for the contractor?
The Court of Appeal determined that the focal issue was whether school district would have been entitled to fees had it performed on its bond cross-claim against contractor and surety. That is a hypothetical inquiry, one not dependent on whether actual factual findings were made. Because Saddleback did seek to enforce the bond under its own pleadings, it would have been entitled to fees had it won on its cross-complaint. That reality meant that section 1717 dictated a similar result in favor of contractor, especially given that the performance bond and contractual breach issues were intertwined. Beyond that, school district did not raise an apportionment argument in the lower court, so it was deemed forfeited on appeal.
The substantial fee award was affirmed, an amount way over one-third of the compensatory award returned in the jury verdict.
