Prevailing Parties Entitled to Contractual Attorneys’ Fees Under California CCP §1717 Notwithstanding Declaration That Contract is Void Under California Government Code §1090

In California-American Water Co. v. Marina Coast Water District (Nos. A146166, 146405, filed 12/15/17), the First District Court of Appeal held that a prevailing party was entitled to an award of contractual attorneys’ fees under Code of Civil Procedure §1717 even though the underlying contracts were declared void under Government Code §1090.

Appellant Marina Coast Water District (“Marina”) and Respondent Monterey County Water Resources Agency (“Monterey”), both public water agencies, and Respondent California-American Water Company (“California-American”), a water utility, entered into several contracts to collaborate on a water desalination project. The parties agreed that the prevailing party of any action in any way arising from their agreements would be entitled to an award of attorneys’ fees.

Upon learning that a member of Monterey’s board of directors had been paid for consulting work to advocate for the agreements on behalf of Marina, California-American attempted to have the contracts declared void under Gov. Code §1090, which prohibits public officials and employees from being financially interested in any contract made by a board of which they are members. Although Monterey conceded the contracts were void, Marina did not, even filing its own cross-claim seeking a declaration that the contracts were valid. The trial court declared the agreements void, which was affirmed in California-American Water Co. v. Marina Coast Water Dist. (2016) 2 Cal.App.5th 748 (California-American I).

Marina next challenged the post-judgment orders awarding California-American and Monterey prevailing party attorneys’ fees under Code Civ. Proc. §1717. Specifically, Marina challenged their legal entitlement to attorneys’ fees under Code Civ. Proc. §1717, arguing that because the contracts at issue were declared void, the case did not involve an action on a contract. It also argued that because the contracts were declared void under Gov. Code §1090, the award of attorneys’ fees was contrary to public policy.

Code Civ. Proc. §1717 provides that, “[i]n 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.”

Although the Court recognized “some intuitive appeal to the argument” that the case was not an action on a contract because the contracts at issue were declared void, it nevertheless affirmed the attorneys’ fees award. The Court relied on the opinion in Santisas v. Goodin (1998) 17 Cal.4th 599 that the purpose of Code Civ. Proc. §1717 is to ensure mutuality of remedy for attorneys’ fee claims under contractual attorneys’ fees provisions, including where a prevailing party successfully argues the invalidity or unenforceability of the same contract.

The Court also relied on Eden Township Healthcare Dist. v. Eden Medical Center (2013) 220 Cal.App.4th 418, which held that a case brought by a healthcare district that sought to have a contract declared void under Gov. Code §1090 was an action on a contract, despite Marina’s argument that Eden Township was inapposite because the contract in that action was declared valid. The Court concluded that, under the principle of mutuality of remedy, California-American and Monterey were entitled to prevailing party attorneys’ fees for having the contracts declared void, just as Marina would have been had it prevailed in having the contracts declared valid.

The Court also rejected Marina’s argument that requiring a party who unsuccessfully defends a lawsuit seeking to have contracts declared void under Gov. Code §1090 violates public policy because attorneys’ fees provisions in illegal contracts are unenforceable. Although the Court acknowledged that, under Code Civ. Proc. §1717, attorneys’ fees will not be awarded if a contract is held unenforceable because the subject matter of the contract is illegal, this exception does not apply when, as here, the litigation involves the invalidity or unenforceability of an otherwise legal contract.

The ruling in California-American Water Co. II has brought further clarification to the issue of whether attorneys’ fees can be awarded under Code Civ. Proc. §1717 in an action concerning the invalidity and unenforceability of a contract when a party prevails in obtaining a declaration that the contract is void under Gov. Code §1090. Subject to limited exceptions, they can.

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December 19, 2017