Facts and Proceedings Below
Thе appellant in this case, Covenant Mutual Insurance Company (Covenant), issued a bond guaranteeing a contractor. This contractor was constructing a supermarket on the property of one of the respondents, William, Ruby and Kenneth Young (the Youngs). A dispute arose between the Youngs and the contractor. The Youngs hired as their attorneys the other respondents, McCormick, Barstow, Shepard, Coyle and Wayte (MBSCW) and Oliver Wanger (Wanger).
Covenant’s attorneys attempted to settle the dispute. Eventually they were convinсed they had arrived at a binding settlement agreement with Youngs’ attorneys, MBSCW and Wanger. After the Youngs refused to sign the purported agreement, Covenant sued not only the Youngs but their lawyers.
Covenant’s complaint included a cause of action for breach of warranty of authority against the two law firms, MBSCW and Wanger. It alleged MBSCW and Wanger represented they had authority to settle the dispute for the Youngs when in fact they did not. As part of this claim, Covenant asked for attorney fees pursuant to Civil Code section 3318.
On February 16, 1984, in a nonjury trial the court decided against the plaintiff Covenant. It entered judgment for defendants MBSCW and Wanger on March 13, 1984. Meantime the successful defendants filed a cost bill which included attorney fees in the amount of $25,913.75. Covenant moved to strike or tax the attorney’s fees. On June 1, 1984, the court entered a minute order denying Covenant’s motion while reducing MBSCW and Wanger’s attorney fee award to an even $24,000.
Covenant filed a notice of appeal on July 20, 1984.
Discussion
The trial court expressly recognized it was reaching beyond existing precedent when it awarded fees to a defendant under Civil Code section 3318. Indeed during the hearing the judge observed: “The fact that there are no cases one way or the other leaves this court with the responsibility of exercising its responsibility to interpret the law as best it can in a new area .... [T]he only . . . question for the court to determine [is] whether the reciprocity that appears to be the way the legislature is moving should be
Fulfilling the trial court’s worst fears, this court now proceeds to adopt “a very, very narrow, conservative approach” to this question. In doing so we do not wish to discourage trial judges from applying their best judgment about the future direction of the law when confronting issues of first impression. Indeed this trial court may prove to have been prescient about what the California Legislature eventually will do in this area. Nonetheless, given the present legislative scheme we feel constrained to limit attorney fee awards to plaintiffs in these breach of warranty of authority actions. Moreover, we believe there are sound policy reasons for continuing to do so.
Section 3318 was first enacted in 1872 and remains unchanged from that date. It reads in full: “Breach of Warranty of Authority. The detriment caused by the breach of a warranty of an agent’s authority, is deemed to be the amount which could have been recovered and collected from his principal if the warranty had been complied with, and the reasonable expenses of legal proceedings taken, in good faith, to enforce the act of the agent against his principal. ” (Italics added.)
The italicized clause of this section supplies the authority—and the sole authority, it should be emphasized—for awarding attorney fees in these actions. Otherwise the so-called American rule requires both winners and losers to bear their own legal fees in this as in all litigation. 1 The California version of the “American rule” is found in Code of Civil Procedure section 1021 which reads in pertinent part: “Except as attorneys’ fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties . . . .” (Code Civ. Proc., § 1021, italics added.) 2 Neither party contends there was an agreement, express or implied, to the effect the loser would pay the winner’s legal fees. Hence we must look for specific statutory authorization for any attorney fee award in this litigation. 3
After trial, the plaintiffs were awarded $1,000 “the amount incurred for attorney fees ‘for the commencement and prosecution’ of this action against Stardust.” (
Had appellant Covenant won in the instant case, it would have been entitled to recover attorney fees from the respondents under section 3318. These fees would have been among the “reasonable expenses of legal proceedings” needed “to enforce thе act” of the lawyers against their principal, that is, to prove the purported agent had committed a breach of his warranty of authority.
This statute by its terms does not, however, expressly or by implication authorize attorney fees for
defendants
who succeed in showing they did
not
commit a breach of warranty of authority. Section 3318 is a “measure of damages” provision not a general attorney fee statute. Defendants do not receive damages and thus cannot claim an element of a damage award. Moreover, as a matter of linguistic construction it is impossible to place them in the class of litigants entitled to legal fees under this statute. By no stretch of imagination do agents
defending
a breach of warranty of authority action incur legal expenses in order “to
enforce
the act of the agent against his principal.” (Italics added.) If anything they are seeking to
Indeed respondents MBSCW and Wanger do not seriously argue the language of section 3318 by itself supports this award. Instead they urge a broader principle—reciprocity—applies. This argument proceeds as follows. In this category of cases the statute authorizes winning plaintiffs to receive attorney fee awards. Hence equity requires that defendants likewise receive attorney fees when they win. In support of this principle the respondents cite Civil Code section 1717 and the policies it implements.
Section 1717 imposes reciprocity when a contract only authorizes attorney fees for one of the two parties to an agreement. 4 If the other party wins a lawsuit, he or she is entitled to an attorney fee award just as if the contract term applied expressly to both. Thus, assume a lease agreement provides the tenant must pay the landlord’s attorney fees if the landlord sues him successfully under the lease. But assume also the lease agreement fails to mention the tenant’s right to recover attorney fees if he wins. The Legislature had intervened to effectively rewrite this lease. No matter what the agreement says section 1717 allows the tenant to recover his attorney fees should he rather than the landlord win.
The actual language of section 1717 offers precious little comfort to respondents. By its terms it confines relief to “actions on contracts” which an action for breach of warranty of authority is not.
(Tri-Delta Engineering, Inc.
v.
Insurance Company of North America
(1978)
Respondents ask we follow the trial court and venture beyond the arid language of section 1717 and into the verdant pastures of underlying principle. They urge what’s sauce for the contractual goose should be sauce for
Respondents point to several cases which have extended the reach of section 1717 and suggest this means the law is evolving toward a general principle of “reciprocity. ” However, at the core of all of these cases was a unilateral
contractual
right to attorney fees not a
statutory
right. What these cases did was broaden the class of litigants who could claim to be parties to the contract and thus entitlеd to attorney fees when they prevailed
(Reynolds Metals Co.
v.
Alperson
(1979)
Respondents’ entire argument overlooks a salient difference between “one-sided” attorney fee provisions which individuals or institutions insert in private contracts and those which lawmakers enact in public legislation. The former are created by private parties for their own private advantage and almost always favor the party with the greater bargaining power.
5
The latter, on the other hand, are created by legislators as a deliberate stratagem for advancing some public purpose, usually by encouraging more effective enforcement of some important public policy. Through enactment of section 1717 the Legislature has evidenced it regards private imposition of unilateral fee-shifting to be
against
the public interest. At the same time, in
The fact lawmakers offer a bounty for plaintiffs who sue to enforce a right the Legislature has chosen to favor in no sense implies it intends to offer this same bounty to defendants who show they have not violated the right. Indeed the more logical explanation is that the Legislature desires to encourage injured parties to seek redress—and thus simultaneously enforce public policy—in situations where they otherwise would not find it economical to sue.
To illustrate, imagine someone contemplating a lawsuit where the potential recovery is only a few thousand dollars. His own legal fees might eat up a good share of the judgment. So he is unlikely to sue even if success is near certain. Or suppose a litigant’s chances of winning are good but far from certain. If he has to deduct his own legal fees from a less than certain judgment, he may not sue even though his injury was quite severe and his potential gross recovery quite large.
In categories of cases where the Legislature wants to encourage litigation it can intervene to alter the decision-making equation by instituting unilateral fee-shifting. Then the injured person knows he will not have to absorb his own lawyer’s legal fees, at lеast if he wins. This makes it economical to seek redress not just in the aggravated cases where the potential economic recovery is huge but in modest cases as well. It also means the probability of success does not have to be so high before it makes economic sense to file suit. Thus, as a result of the Legislature’s intervention, more injured parties will be able to file more lawsuits and the public policy behind the substantive statute—whatever it may be—will be enforced more broadly and more effectively. Moreovеr, as one commentator observes: “Awarding fees as part of a prevailing plaintiff’s relief should also provide increased and efficient deterrence of wrongful primary conduct because of the prospect of having to pay the full cost that an injured party incurs in securing compensation for its loss . . . .” (Rowe, Attorney Fee Arrangements and Dispute Resolution, paper prepared for the National Conference on the Lawyer’s Changing Role in Resolving Disputes, Harv. Law Sch., Oct. 14-16, 1982, at p. 41, citing Posner, Economiс Analysis of Law (1977) p. 143, italics added.)
Respondents and the trial court ask us to superimpose some judicially manufactured principle of “reciprocity” on the statutes which call for one-
Economic analysis likewise supports the proposition that two-way fee-shifting will cause fewer claims to be filed than either the American rule of no fee-shifting or one way proplaintiff fee-shifting as provided in Civil Code Section 3318.
9
As one leading authority summarizes:
“The approach that should uniformly encourage the pursuit of claims of all sorts in all situations is a one-way pro-prevailing-plaintiff rule. Such a policy permits plaintiffs to expect greater net recoveries, without adding a counterbalancing threat of loss .... For the middle-income litigant, to whom the risk of having to pay сosts would be a major deterrent, the difference between American and one-way rules on the one hand, and the two-way approach with its threat of substantial costs on the other, should be quite significant. ” (Rowe, Predicting the Effects of Attorney Fee Shifting, op. cit. supra, at pp. 147-148.) Elsewhere this same commentator observes: “[W]ith medium-strength claims, risk aversion by plaintiffs of modest means appears highly likely to play a significant role. The probable result is that the threat of substantial loss—despite the chance of larger gain than under the Americаn rule—would deter the middle class from pursuing plausible but less than highly promising claims, ...” (Rowe, Attorney Fee Arrangements And Dispute Resolution, op. cit. supra, at p. 26, see also, Comment, Distribution of Legal Expense Among Litigants (1940) 49 Yale L.J. 699, 702-703.) 10 This analysis also compares the effects of various fee-shifting arrangements where the claimant is represented by a contingent fee
The award of attorney fees to respondents is reversed. The remainder of the judgment is not challenged and is affirmed. Appellant to bе awarded its costs on appeal.
Lillie, P. J., and Thompson, J., concurred.
Notes
In civil law and other common law countries the losing party has to pay the winning party’s “reasonable legal fees” in all or at least nearly all categories of litigation.
The full text of Code of Civil Procedure section 1021 reads: “Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties; but parties to actions or proceedings are entitled to costs and disbursements, as hereinafter provided.”
“The Legislature has established that in the absence of an express agreement or statute, each party to a lawsuit is responsible for its own attorney’s fees [citations omitted].”
(Davis
v.
Air Technical Industries, Inc.
(1978)
Section 1717 provides 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 the provisions of that contract, shall be awаrded either to one of the parties or to the prevailing party, then the party who is determined to be the prevailing party, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees . . . .” (Civ. Code, § 1717, italics added.)
As explained by one Court of Appeal, “It is common knowledge that parties with superior bargaining power, especially in ‘adhesion’ type contracts, customarily include attorney fee clauses for their own benefit. This places the other сontracting party at a distinct disadvantage. Should he lose in litigation, he must pay legal expenses of both sides, and even if he wins, he must bear his own attorney’s fees. One-sided attorney’s fees clauses can thus be used as instruments of oppression to force settlements of dubious or unmeritorious claims. [Citations omitted.] Section 1717 was obviously designed to remedy this evil.”
(Coast Bank
v.
Holmes
(1971)
Of 210 fee-shifting statutes listed in Pearl, California Attorney’s Fee Award Practice, appendix B, pages 165-195 (Mar. 1985 supp. IV) fully 169 explicitly limit the award to one party, usually the plaintiff or claimant. Thе rest authorize the award of attorney fees to the “prevailing party,” whichever side wins. (Pearl, supra, at pp. 67-71.)
We are aware another division of this court recently endorsed this principle in the contex t of a different but similar statute (Civ. Code, § 3083) which imposed unilateral fee-shifting. See in advance sheets Kelemen Construction, Inc. v. American City Bank (Cal.App.). However, the Supreme Court ordered this opinion not to be published. Accordingly, we find it unnecessary to question the conclusion or the reasoning of this opinion.
This was the conclusion of an empirical study of mutual fee-shifting in England’s “payment into сourt” system. (Zander, Costs of Litigation—A Study in the Queen’s Bench Division (June 25, 1975) Law Socy. Gazette, at p. 680 et seq.)
The question of fee-shifting and its impact on litigation decisions has been examined rather extensively in one of the more legitimate applications of economic analysis to law and legal processes. See, e.g., Mause, Winner Takes All: A Re-Examination of the Indemnity System (1969) 55 Iowa L.Rev. 26; Posner, An Economic Approach to Legal Procedure and Judicial Administration (1973) 2 J. Legal Stud. 399; DeWees et al., An Economic Analysis of Cost and Fee Rules for Class Actions (1981) 10 J. Legal Stud. 155; Rowe, The Legal Theory of Attorney Fee Shifting: A Critical Overview, 1982 Duke L.J. 651; Shavell, Suit, Settlement, and Trial: A Theoretical Analysis Under Alternative Methods for The Allocation of Legal Costs (1982) 11 J. Legal Stud. 55; Rowe, Predicting the Effects of Attorney Fee Shifting (1984) 47 Law & Contemp. Probs. 139.
Although the viewpoints and results are by no means unanimous, one can distill some useful lessons from this form of analysis. The impact of various fee arrangements on a given claim or class of claims generally will be affected by at least three factors: (1)
How the competing litigants—or typical categories of competing litigants—feel about the inevitable risks of litigation.
Which ones like to take risks, which are afraid of risk, and which are in the middle neither liking nor fearing risk. Those who fear risk are termed “risk aversive”; those who neither prеfer nor fear risk are called “risk neutral.” A “risk preferrer” will reject $2,500 in cash in favor of a 25 percent chance to gain $8,000 even though that chance is only worth $2,000 (25 percent of $8,000). Someone who is “risk neutral” would take the $2,500 in this situation but would be indifferent if offered a 25 percent chance at a $10,000 payoff since it would be worth the same, that is, $2,500 (25 percent of $10,000). But someone who is “risk aversive” clearly would take the $2,500 in cash over the 25 percent chance of gaining $10,000 and if really “risk aversive” might well take the $2,500 in preference to a 25 percent chance at $20,000 even though that chance is worth $5,000.
The rationale for these conclusions can be found in the threе factors identified in footnote 9, ante. Each individual dollar is less critical to survival as one gets more of them (law of diminishing marginal value of money). Hence according to this analysis wealthy people tend to be less risk aversive than low and middle income people. Moreover, litigants who engage in a lot of litigation can balance their losses in some cases against their wins in others and thus tend to be “risk neutral.” (Galanter, Why The “Haves” Come Out Ahead: Speculations on the Limits of Legal Change (1974) 9 Law & Soc’y Rev. 95, 99-100 and fn. 11, where the author definеs the frequent litigator—typically an institution like government or a union or a credit agency—as a “repeat player” and the rest as “one-shotters.”) Thus, this analysis suggests modest income one-shot claimants will be risk aversive. This means they will be less attracted by the uncertain gains and more apprehensive about the potential losses of litigation.
Now assume this risk averter is deciding whether to file a relatively modest claim. Further assume the claimant’s costs of litigating the claim are high and the defendant’s costs about the same. Also assume the claimant’s objective chances of winning are in the 40-80 percent range, not 95-100 percent. Even assume it would still be rational for a claimant to file suit and indeed a “risk neutral” one would. Nonetheless, according to these analysts, our “risk aversive” claimant—who happens to be typical of most individual litigants—would undervalue the sum he might win if successful (the modest damage recovery plus payment of his own high attorney fees) and overvalue the sum he might lose if unsuccessful (both his own attorney fees and his opponent’s). Thus two-way fee-shifting wоuld discourage him from
In justifying the essentially one-way nature of fee-shifting in federal civil rights cases, Senator Orrin Hatch made statements which suggest how any legislature might react to well-meaning attempts to tamper with the litigation inсentives it deliberately established.
“Some State and local government officials have suggested that a fairer approach, and one which would deter frivilous suits, would be to allow plaintiffs and defendants to recover equally.
“The legislative history of the 1976 Fees Act pointed out clearly, and correctly I think, the need for the dual standard: If the persons seeking to enforce their civil rights were faced with paying their opponents [szc] attorneys’ fees if they simply did not win the case, the Fees Act would create a greater disincentive to bring these civil rights suits than the situation it attempted to remedy.” (128 Cong. Rec. S4878 (daily ed. May 11, 1982).)