Court of Appeal Rejects Plaintiffs’ Claim

Court of Appeal Rejects Plaintiffs’ Claim for Contractual Attorneys’ Fees

In Rideau v. Stewart Title of California, a California appellate court rejected a buyers’ argument that they were entitled to attorneys’ fees on their successful claim against Stewart Title for breach of contract.

In Rideau, plaintiffs contracted with a developer for the construction of a condominium. They deposited funds with Stewart Title. In the escrow instructions, Stewart Title agreed that the funds would be released at the seller’s direction to a fund control company. Stewart Title released the funds to a different entity. Thereafter, the project did not complete and plaintiffs lost their deposit. Plaintiffs filed suit against Stewart Title for breach of contract and negligence. They prevailed on the cause of action for breach of contract and filed a motion for attorneys’ fees.

In the attorneys’ fees motion, plaintiffs argued that they were entitled to attorneys’ fees pursuant to Civil Code section 1717 because of the following sentence in the escrow instructions at the end of an indemnity provision in favor of Stewart Title:

We, the undersigned, hereby hold Stewart Title harmless from any loss or damage which may be sustained by reason of the above disbursement instruction, and for the failure of any of the conditions of this escrow, and for the recovery of said money so released, and agree to defend you against any claims whatsoever arising from [sic] and [sic] any attorneys fee, expenses or costs incident thereto.

Stewart Title argued that the sentence was part of a unilateral indemnity provision that required buyers and sellers to defend and indemnify Stewart Title, and that the reciprocity contemplated by Section 1717 did not apply. The trial court ruled in favor of Stewart Title, relying on case law providing that the policy of attorney fee reciprocity generally does not apply to attorneys’ fee provisions in indemnity clauses.

Plaintiffs appealed. The Court of Appeal noted that Section 1717 gives rise to a reciprocal right to contractual attorney fees as to all parties enforcing a contract, even where the contract accords a right to such fees to one party, but not the other. However, the escrow instructions did not include a separate attorneys’ fees provision and the reference to fees was in the indemnity provision only. The Court noted that the intent of the indemnity agreement in this context was to protect the title company in the event it incurred costs and fees related to a dispute between the buyer and seller, and that the indemnity language was not intended to provide for the reciprocal recovery of fees in an action between plaintiffs as principals and the escrow holder. The Court explained:

It does not seem logical that the principals (the Rideaus) should be able to sue on the Instructions to recover not only direct breach of contract damages from Stewart Title, but also assert they were actually seeking first party contractual indemnity that would in turn support their related claim for attorney fees, on a contract basis. The Rideaus as principals were not acting in enforcement of the indemnity clause in the Instructions, but rather they were claiming rights under the previous disbursement portion of the Instructions, which was independent of an indemnity situation.

As a result, plaintiffs’ recovery was not the result of enforcement of the indemnity provision and Section 1717 was not triggered. The Court of Appeal affirmed the order and judgment denying plaintiffs’ attorneys’ fees motion.

-Hannah Shafsky, Attorney