You may win in court, lose in legal fees
By Jeff Lerman
If you’re involved in a dispute, don’t make the same mistake as the defendant in a recent California appellate court case, or you could end up losing your contractual right to recover attorney’s fees — potentially a six-figure amount — when you win your next lawsuit.
The key facts of that case may very well apply to you. The dispute in Cullen v. Corwin ((2012) 206 Cal.App.4th 1074), arose from a ”standard form” real estate purchase contract between a seller and buyer — but this case applies to all contracts, not just real estate contracts. The contract included a fairly standard attorney’s fees clause, providing that the prevailing party in any dispute is entitled to recover their legal fees.
However, that right was made subject to a common mandatory mediation clause: “If, for any dispute … to which this paragraph applies, any party commences an action without first attempting to resolve the matter through mediation, or refuses to mediate after [the making of ] a request …, then that party shall not be entitled to recover attorney[ ] fees…” (quoting from Lange v. Schilling (2008) 163 Cal.App.4th 1412, 1416-1417).
Different contracts may have different versions of this concept, but the essence of this court’s decision is still relevant.
After filing his complaint, the plaintiff requested mediation twice, but defendant rejected both requests because he first wanted to engage in some discovery and have the court rule upon his motion for summary judgment. The defendant won his motion for summary judgment and received a judgment in his favor.
Unfortunately, when defendant tried to recover his legal fees under the attorney’s fees clause, the court denied his request because defendant failed to mediate when requested by plaintiff. In so holding, the court quoted from a 2004 California appellate court ruling in issuing strong language that every litigant should heed:
“‘The new provision barring recovery of [legal] fees by a prevailing party who refuses a request for mediation means what it says and will be enforced’ (quoting Frei v. Davey (2004) 124 Cal.App.4th 1506, italics added in Cullen).
“The requirement ‘is designed to encourage mediation at the earliest possible time’ (Lange at p. 1418). Opponents, accordingly, are not entitled to postpone it until they feel that they have marshaled the strongest possible support for their positions in litigation and mediation. Moreover, there is a strong public policy in the promotion of mediation ‘“as a preferable alternative to judicial proceedings”’ (Lange at p. 1417, italics added) in a less-expensive and more-expeditious forum.
“The costly and time-consuming procedures connected with discovery are thus not a necessary adjunct to mediation proceedings that a party can demand before participating. These excuses are, therefore, inadequate as a matter of interpretation of the contractual provision in light of the policy it promotes.”
In other words, defendant ended up winning the battle but losing the war.
Don’t make this mistake in your next contract dispute. Make sure you read your contract carefully with your lawyer as soon as the dispute begins. You must understand if your contract has a mandatory mediation clause and, if it does, precisely what it requires. Some require a mediation to take place within a relatively short period of time at the beginning of a dispute.
Paragraph 26A in the current California Association of Realtors Residential Purchase Agreement has important differences from the language in the above case. Not every mandatory mediation clause is the same, and you should have a lawyer help you understand the language and requirements of yours. This important new court decision puts everybody on notice: The courts will strictly enforce these mandatory mediation clauses. Make sure you use this court ruling to your advantage in your next dispute.
Jeffrey H. Lerman, Esq., of San Rafael-based Lerman Law Partners (415-448-7778, realestateinvestorlaw.com) is a real estate investor, real estate broker and attorney specializing in acquisitions and sales, entity formation, syndication, commercial leases, loan documents, construction documents, loan workouts, business practices and related litigation.
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