Peter C. Bronson: Mediation required to settle dispute
In most lawsuits and other legal proceedings, the winning and losing parties are each responsible for paying their own attorney fees. This is known as the “American Rule”. In Great Britain, under the “English Rule”, the losing party frequently must pay the winner’s attorney fees. There have been many attempts over the years to enact the “English Rule” in the United States, but it is extremely unlikely ever to happen.
However: As readers of prior columns may know, there are exceptions to the “American Rule”. One of those exceptions, under California law, is this: A contract may provide that in the event of a lawsuit or dispute arising under the contract, the prevailing party may recover reasonable attorney fees from the losing party. Such provisions in a contract are normally enforceable; and they are commonly included in agreements.
In fact, the standard California residential purchase agreement, used in most residential real estate transactions, does so provide. However, that standard form agreement also requires that if any party to the agreement commences a lawsuit without first attempting to resolve the dispute through mediation, or if a party refuses to mediate, then such party cannot recover attorney fees, even if he or she is the winning party.
The importance of full compliance with that mediation requirement is made clear by a recent decision of the California Court of Appeal.
In the case of Lange vs. Schilling, plaintiff Lange had bought a lake house. He alleged that the sellers and their brokers had failed to disclose construction problems with the house, and that they had made misrepresentations concerning the water level of the lake.
Lange was unable to locate the sellers, so he filed a lawsuit against them and the brokers without having first attempted to resolve the dispute through mediation. After the suit had been filed, Lange hired an investigator to locate the sellers, and he traced them to a mail drop in Pahrump, Nevada. Eventually they were located and were served with Lange’s lawsuit.
Afterwards, the parties made contact. Lange’s attorney wrote to the sellers’ attorney, and pointed out the mediation requirement under the real estate contract. In his letter, Lange’s attorney offered to mediate the dispute, and asked the sellers’ attorney to let him know if the sellers did wish to mediate; “otherwise,” Lange’s attorney wrote in the letter, “we will assume that both parties are waiving” the mediation requirement.
There was apparently no response to the letter, and the case went to trial. At trial, Lange recovered a judgment of $13,475 against the sellers and the brokers. Lange then asked the court to award him $113,096.13 in attorney fees, on the ground that he was the prevailing party under the agreement. The defendants opposed the motion, on the ground that Lange had not attempted to mediate the dispute before filing his complaint as required by the agreement.
The trial court awarded fees of $80,710.26 to Lange, representing the amount of fees incurred subsequent to Lange’s offer to mediate. The court made this award on the ground that Lange had shown “reasonable justification” for failing to offer mediation prior to filing his lawsuit. He could not locate the sellers; he had to hire an investigator to find them; and after he filed his lawsuit, he offered to stay the litigation in order to mediate the matter.
The defendants appealed. In a decision published about two weeks ago, the Court of Appeal has overturned the award of attorney fees. The appeals court reversed the trial court’s award, ruling that the agreement means exactly what it says: An attempt to mediate must be made before filing a lawsuit, not after. Unquestionably, Lange filed his lawsuit first, and attempted to mediate later.
The appeals court said that offering mediation after suing violated the plain terms of the agreement: ‘By filing his complaint before attempting mediation, plaintiff lost any right to attorney fees.’ The court said that the purpose of the mediation requirement was to encourage mediation at the earliest possible time, in the hope that cases might be settled before substantial attorney fees were incurred; and that the mediation requirement would become meaningless if a party were allowed to sue first and ask for mediation later.
Although the Court of Appeal did not say so, it may also have been influenced by the fact that Lange had asked for more than $113,000 in attorney fees even though he had recovered a judgment of only $13,475. (In other words, Lange may have violated the legal principle one of my law professors used to quote: “It’s okay to be a pig, but don’t be a hog!”)
The lesson of the Lange case is crystal clear. If you are a party to a standard residential purchase agreement containing the usual mediation requirement, and a dispute arises, you must attempt to mediate the dispute before you commence any legal proceedings. Otherwise, no matter what your excuse may be for suing first and seeking mediation later – and whether your opposing parties are in Pahrump, Nevada or just around the corner – you will almost certainly lose your right to recover attorney fees from the opposing party after you win the lawsuit.
Peter C. Bronson, of Nevada County, is a partner in the Sacramento offices of Kelly Lytton & Vann LLP. His law practice emphasizes creditors’ rights, insolvency, commercial litigation and mediation. Write him at email@example.com. This column is not intended as legal advice in any specific business situation or dispute; specific strategic decisions always depend upon the specific facts.
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