The Impact of California Civil Code Section 1717
Businesses often include attorney’s fees provisions in their contracts to protect themselves in case of litigation. However, companies operating in California should carefully consider whether these provisions are in their best interest due to the effects of California Civil Code section 1717. This statute can turn a one-sided attorney’s fees clause into a mutual obligation, potentially creating unintended consequences for businesses.
California Civil Code Section 1717
California Civil Code section 1717 states in pertinent part:
(a) 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.
Where a contract provides for attorney’s fees, as set forth above, that provision shall be construed as applying to the entire contract, unless each party was represented by counsel in the negotiation and execution of the contract, and the fact of that representation is specified in the contract.
Reasonable attorney’s fees shall be fixed by the court, and shall be an element of the costs of suit.
Attorney’s fees provided for by this section shall not be subject to waiver by the parties to any contract which is entered into after the effective date of this section. Any provision in any such contract which provides for a waiver of attorney’s fees is void.
Assessing the Risk: Should You Include an Attorney’s Fees Clause?
When considering whether to include an attorney’s fees provision, businesses should evaluate the likelihood that they will actually sue their counter-party, and whether they are more likely to win a lawsuit. Some companies are more likely to sue their clients, while others are more likely to be sued. For example, consider that:
- Retail businesses or service providers that frequently deal with non-paying customers may benefit from an attorney’s fees clause.
- Contractors, attorneys, and medical professionals often find themselves defending against lawsuits rather than pursuing them. In such industries, an attorney’s fees clause could backfire, forcing the business to cover the legal costs of clients or patients who successfully sue them.
- If you will never sue anyone then you will never need to actually rely on the attorney’s fees provision after a litigation. Again, having it in your contracts, website terms and conditions (etc.) could just backfire by “encouraging” your clients to sue your business.
Alternatives to Attorney’s Fees Provisions
Instead of relying on an attorney’s fees clause, businesses can take proactive steps to ensure they get paid without increasing their litigation risk:
- Regular Invoicing: Send invoices promptly and follow up on unpaid balances to prevent accounts from becoming overdue.
- Strict Credit Policies: Vet clients before extending credit and require deposits or retainers where appropriate.
- Avoid High Accounts Receivable (A/R) Balances: Keep a close watch on outstanding payments and take early action to collect overdue amounts.
Conclusion
California Civil Code section 1717 levels the playing field when it comes to attorney’s fees provisions in contracts. Businesses should carefully assess their litigation risks before including such clauses in their agreements. In industries where companies are more likely to be sued than to sue, attorney’s fees clauses could be a liability rather than an advantage. An attorney’s fees provision can actually encourage someone to file a lawsuit or make it easier for a disgruntled customer to find an attorney willing to take the case. Instead, businesses should consider focusing on sound financial practices and effective client management to mitigate payment risks and avoid costly legal disputes.