Opinion
NOT TO BE PUBLISHED
APPEAL and cross-appeal from a judgment and posttrial orders of the Superior Court of San Diego County No. GIC840032, Jay M. Bloom and Randa Trapp, Judges.
HUFFMAN, Acting P. J.
This appeal and cross-appeal raise various challenges to a judgment after jury trial and posttrial orders regarding attorney fees and costs. The complaint for damages for breach of contract and negligence arose out of a 1997 construction contract for improvements on property, entered into between the owner of the property, Susan Ryan Rappaport (Ryan), and the general contractor, defendant and cross-appellant Grahovac Construction Co. (the Contractor). In 1998, during construction, Ryan transferred the real property to her family trust of which she was the sole trustee, plaintiff and appellant Rappaport Family Trust (the Trust). Construction was carried out by the Contractor and various subcontractors it hired, including cross-defendant and cross-respondent P. Teixeira Construction, Inc. (the subcontractor or Teixeira), which did the grading at the site. After being sued in 2004, the Contractor cross-complained against, among others, the subcontractor.
In the verdict, the Trust and its associated plaintiff and appellant, The Gifted Schools, Inc. (a corporation which Ryan wholly owns and operates; called "the Corporation" here), received an aggregate damages award of $438,610 against the defendant Contractor (breach of contract and negligence), as well as an award of attorney fees as prevailing parties on the contract. (Civ. Code, § 1717.) The Trust and the Corporation (together "Plaintiffs") argue on appeal that this judgment insufficiently compensated them for construction defects, because they were not allowed to pursue additional theories of recovery, including a third party beneficiary contract cause of action and economic loss damages. They contend the construction contract put the Contractor on sufficient notice of such potential claims, because the contract identifies the construction project as a preschool facility called the Gifted Preschool (the "Project"), and that the Corporation operating the preschool foreseeably lost money due to defects at the site and the need for repair.
The Contractor, as the respondent, argues against the appropriateness of any such additional theories of recovery proposed by Plaintiffs. In its cross-appeal, the Contractor challenges the posttrial rulings on the parties' various motions for contractual attorney fees and costs. (Civ. Code, § 1717.) The Contractor argues the trial court erroneously awarded $400,000 contractual prevailing party attorney fees to Plaintiffs, collectively. Instead, the Contractor argues it should have received the only award of attorney fees, since the trial court should have taken into greater account that the Trust did not receive as large an award of damages as it sought, and that the Corporation lost on all of its contract claims. (Civ. Code, § 1717.)
The Contractor further claims it was error for the trial court to deny it recovery of costs and fees against Plaintiffs, under Code of Civil Procedure section 998, based on the pretrial settlement offer it made to them. (All further statutory references are to the Code of Civil Procedure unless noted.)
Also in the verdict, the jury found no liability of the subcontractor on the cross-complaint by the Contractor. The Contractor additionally cross-appeals the posttrial order of the trial court granting attorney fees to the subcontractor as prevailing party on the cross-complaint, in the amount of $296,148.84. (Civ. Code, § 1717.) Under the Contractor's interpretation of the subcontract's indemnity clause, this award would represent an abuse of discretion. (Crawford v. Weather Shield Mfg. (2008) 44 Cal.4th 541 (Crawford).)
Our analysis of the appeal issues leads us to conclude that the appropriate theories were presented to the jury for resolution, and it was not error to deny a new trial. The judgment for damages in favor of the Trust is adequately supported on findings of breach of contract and negligence. The judgment for $5,000 negligence damages in favor of the Corporation is likewise supported by the record. Plaintiffs' contentions are not well founded, that the trial court's pretrial rulings erroneously denied them an opportunity to put on further evidence of damages under their preferred theories of recovery. These would have included a third party beneficiary contractual theory on behalf of the Corporation, or other theories permitting recovery by the Corporation of economic loss in tort or contract. The Corporation does not qualify as a third party beneficiary of the construction contract between the Contractor and the Trust. (Lucas v. Hamm (1961) 56 Cal.2d 583 (Lucas).) Nor does any "special relationship" exception to the rule against recovery of economic loss, in an extracontractual context, apply to these facts, as the Corporation argues. (J'Aire Corp. v. Gregory (1979) 24 Cal.3d 799 (J'Aire).)
We further agree with the trial court's postjudgment ruling, that the Trust was entitled to an award of attorney fees as prevailing party on the contract, against the Contractor. (Civ. Code, § 1717.) However, it was error for the trial court to include the nonsignatory Corporation within the scope of that contractual attorney fees award, because it did not successfully pursue any contractual theories of recovery. (Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 129 (Reynolds).) It is also unclear how the trial court selected the $400,000 figure for both Plaintiffs, and we will reverse the postjudgment order for attorney fees for recalculation of the amount of contractual attorney fees that are properly due to the Trust.
Moreover, the Contractor's motion for its own prevailing party contractual attorney fees as to the Corporation, a nonsignatory to the contract, was incorrectly denied, because the Contractor successfully defeated all the theories pursued "on the contract" by the Corporation (as a party or a third party beneficiary). (Reynolds, supra, 25 Cal.3d at p. 129.) The success of the Corporation in receiving a $5,000 damages award in negligence against the Contractor is not relevant to the prevailing party issues on contract, and the Corporation lost to the Contractor on the contract theories. (Civ. Code, § 1717; § 1032; Federal Deposit Insurance Corporation v. Dintino (2008) 167 Cal.App.4th 333 (FDIC).)
Further, the trial court was correct in determining in the posttrial proceedings that the Contractor was not entitled to section 998 costs and fees, because the settlement offer it made was not sufficiently clearly allocated as between the two Plaintiffs (Trust and Corporation), and may reasonably have been read as being conditional as to both of their acceptances. (Peterson v. John Crane, Inc. (2007) 154 Cal.App.4th 498 (Peterson).)
Regarding the Contractor's cross-appeal of the award of attorney fees to the subcontractor Teixeira, we will affirm this order as it is supported by the record and no abuse of discretion has been shown. (Civ. Code, § 1717.)
We accordingly affirm the judgment, while reversing the posttrial orders only to the extent that any reference to the Corporation must be deleted from the contractual attorney fees award to "Plaintiffs," and further proceedings must be held to recalculate the prevailing party contractual attorney fees due to the Trust alone. (Civ. Code, § 1717.) Likewise, further proceedings are required to allow the Contractor an award of attorney fees against the Corporation, because the Contractor is the prevailing party as to the Corporation, on the contract theories. (Civ. Code, § 1717; §1032; Santisas v. Goodwin (1998) 17 Cal.4th 599 (Santisas).) The trial court may allow any appropriate offsets of ordinary costs alone as between the Contractor and the Corporation on the tort theory of negligence, on which the Corporation was the prevailing party with respect to damages and as to ordinary costs. (§ 1032, subd. (a)(4); Scott Co. of Cal. v. Blount, Inc. (1999) 20 Cal.4th 1103, 1114 (Scott).) As already stated, the orders denying the Contractor's motion for costs and fees under section 998 and awarding attorney fees to the subcontractor, Teixeira, are affirmed.
For the reasons to be explained in part IIA, post, we deny Plaintiffs' motion to submit additional evidence on appeal. (§ 909.)
FACTUAL AND PROCEDURAL BACKGROUND
The issues on appeal arise from the interplay and chronology of Ryan's various business and family-related entities and transactions. Only a broad outline of these transactions and proceedings is required, however, because the issues raised on appeal are mainly legal in nature, so that specific details of the construction work performed are not necessary. Our focus is upon the manner in which the respective parties presented their cases regarding damages, in the pretrial motion and trial proceedings, in light of their differing contract interpretation arguments. More detailed facts regarding the attorney fees and costs issues will be set out separately in our discussion of the cross-appeal (pt. III, post).
A. Background: Transactions
In December 1981, Ryan incorporated a preschool business, and through a 1986 amendment, she changed its name to The Gifted Schools, Inc. (i.e., the Corporation). She has always been the president and sole shareholder of the Corporation, which owns and operates The Gifted Preschool. (These facts were brought out during the summary adjudication proceedings.)
In 1997, Ryan personally was the record owner of the Encinitas property that is the location of the Project. At that time, the family Trust was already in existence, and she is the trustee and has always controlled the Trust.
On October 13, 1997, Ryan and the Contractor filled out a form contract for construction of The Gifted Preschool, identified in the contract as the "Project." It is a 7,600 square foot preschool facility with two buildings and other improvements, including a parking lot and supporting retaining wall. She and her architect (not a party to this appeal) provided the plans and specifications. Contractor acted as the general contractor and hired subcontractors, including the grading company, Teixeira. Construction was commenced in February 1998 and took about a year.
After Ryan entered into the contract, and while construction was going on, she created an agreement in December 1997 by which her existing Trust leased the property/project to the Corporation for 10 years. In March 1998, during construction, she completed transfer of the property to the Trust. The Trust anticipated that the Corporation would occupy and run the preschool facility. Ryan signed a notice of substantial completion of the project in February 1999. The Trust renewed the lease to the Corporation in 2004.
After a few years, the Project manifested soil subsidence damage, such as stains on the building's wall and cracks in the parking lot retaining wall. This lawsuit followed.
B. Litigation: Pleadings and Motion for Summary Adjudication
In December 2004, the Corporation and the Trust filed this action against Contractor, alleging numerous construction defects in the flat work, waterproofing, retaining walls, and floors. Against Contractor, these theories were asserted: (1) breach of contract; (2) breach of warranty; (3) negligence; and (4) strict liability. A first amended complaint was filed by Plaintiffs.
The Contractor filed a cross-complaint seeking indemnity against subcontractors, including Teixeira. Other subcontractors settled before trial.
In December of 2006, the Contractor brought a summary adjudication motion on numerous grounds, mainly attacking the standing of the Corporation and the Trust to sue in contract or seek economic damages for business interruption (over $2.3 million), as they were not parties to the construction contract. (§ 437c, subd. (f).)
After opposition was filed and the motion was argued, Judge Bloom issued a detailed order on December 8, 2006, granting summary adjudication in part and denying it in part. As relevant here, the order provides that the Corporation's breach of contract and breach of warranty causes of action were summarily adjudicated and dismissed, based on undisputed evidence that the Corporation was not a party to the construction contract nor an owner of the property. The court noted that the contract does not indicate that Ryan signed it in her capacity as an agent for the Corporation, nor that the Corporation was a third party beneficiary to the contract.
Also, the court granted summary adjudication on any claims for economic damages based on strict liability.
However, the court denied summary adjudication as to the contract and breach of warranty claims by the Trust. The court found that the Trust could maintain its claims based on Ryan's transfer of ownership of the underlying property. (The ruling did not decide if any business interruption damages could be pursued by the Trust.)
Following the hearing on the motion, Plaintiffs were allowed to attempt to cure the defects in pleading their third party beneficiary theory, and they filed a second amended complaint (SAC) on December 18, 2006. It added a sixth cause of action on behalf of the Corporation, breach of contract on a third party beneficiary theory.
C. Demurrer to SAC; the Parties' Section 998 Offers
The Contractor promptly filed a demurrer to the newly filed SAC, contending that the Corporation could not state such a third party beneficiary cause of action, because no express intent to benefit it was shown by the parties on the face of the contract, which was attached as an exhibit to the SAC. (Civ. Code, § 1559.)
Around the same time, February 7, 2007, Plaintiffs served the Contractor with an offer to compromise under section 998 for $1.75 million. The Contractor had insurance coverage of $1 million.
On February 23, 2007, Judge Bloom heard argument and referred in passing to the previous summary adjudication proceedings. His order sustained the demurrer without leave to amend, on the grounds that no facts had been pled or could be pled to show that the Corporation was an intended third party beneficiary of Ryan's contract with the Contractor.
A few months later, the Contractor made a section 998 offer "to plaintiffs" in the amount of $605,000. (Apparently, it had also made a smaller offer either in 2006 or 2007.) Plaintiffs rejected the offers, seeking over $4 million for settlement.
D. Trial and Motions in Limine
The parties went to trial before Judge Trapp on Plaintiffs' allegations of "serious soil problems at the site, with resulting damage throughout the buildings and exterior improvement[sic]." Plaintiffs sought $3 million damages from defective construction and the failure of the grading "to support imposed loads and causing cracks and separation of flatwork."
In preparation for trial, Plaintiffs indicated they would be presenting evidence at trial of the Corporation's lost earnings and/or loss of use damages, amounting to over $2.3 million. Plaintiffs' theory was that even though the Corporation was not a party to the contract, an exception to the economic loss rule exists for its claim, based on "negligent performance of a contract." (J'Aire, supra, 24 Cal.3d at p. 804.)
Both parties brought numerous motions in limine. The Contractor's motion no. 3 sought to exclude such evidence of economic loss damages, on the ground that the previous rulings on motions had eliminated any contract claim by the Corporation for damages and the Corporation's remaining negligence cause of action would not, as a matter of law, support such claims. This motion was tentatively granted. After further argument on related motions, Plaintiffs' counsel said the economic loss issue was probably "moot" because Plaintiffs would not "be offering such evidence," based on other pretrial rulings. Plaintiffs then "withdrew" their objection to the Contractor's motion in limine.
During the six-week trial, Plaintiffs presented evidence and argument on their breach of contract and negligence theories of the Trust, and on negligence grounds as to the Corporation.
In its defense case, the Contractor argued there were no "serious" defects in the new construction, and claimed that at most, it should be liable to Plaintiffs for the cost of repairs associated with missing braces, stucco cracks, and failure of waterproofing at the rear of one of the two buildings. The Contractor also pursued its cross-complaint for indemnification against the subcontractor, Teixeira.
After deliberations, the jury decided that the Contractor had breached the contract and was negligent in its work as to the Trust. On both claims, the verdict awarded the Trust the same amount, alternatively, as the cost of repair in the amount of $203,610. The jury found that the Trust had also incurred investigative costs of $230,000, and imposed them as related repair damages, for an award totaling $433,610. (See Stearman v. Centex Homes (2000) 78 Cal.App.4th 611 (Stearman) [regarding a tort basis for investigative costs awards].) As to the plaintiff Corporation, the jury gave it $5,000 in negligence damages, and judgment was entered accordingly.
With regard to the Contractor's cross-complaint for indemnification, the jury found the subcontractor was not negligent. Judgment was entered on the verdict, finding the subcontractor was the prevailing party.
E. Posttrial Motions
Plaintiffs moved for new trial on the following grounds: (1) the previous rulings on the demurrer and summary adjudication motion were wrong and therefore irregular; (2) the trial court's rulings on the motions in limine regarding economic loss were erroneous; and (3) the jury's award of damages was inadequate. They also filed a motion for judgment notwithstanding the verdict (JNOV) on the ground that the evidence at trial was insufficient to support the verdict.
On September 17, 2007, the trial court issued an order denying the new trial and JNOV motions. The court determined that the amount of damages awarded was not so inadequate as to justify a new trial.
Further, the trial court heard numerous posttrial motions concerning requests for attorney fees and costs under Civil Code section 1717 and Code of Civil Procedure section 998. We will outline those proceedings in further detail in part III, post, since they are the subject of the cross-appeal. Briefly, we note only that, first, the Contractor's motion for costs and fees under section 998 was denied when the court found that the offer was defective and unclear, because it had not been allocated as to each Plaintiff.
Second, the trial court granted contractual attorney fees to both Plaintiffs in "the reasonable amount" of $400,000.
Third, the court denied the Contractor's motion for contractual attorney fees as against the nonsignatory Corporation, observing that the Corporation had obtained a net monetary recovery ($5,000 negligence damages). (§ 1032, subd. (a)(4); Civ. Code, § 1717.)
Fourth, the subcontractor's motion for attorney fees against the Contractor, based on the indemnity clause in the subcontract and on the jury verdict finding no liability on its part, was granted in the amount of $296,148.84. (Civ. Code, § 1717.)
F. Proceedings Pending Appeal
The parties filed their respective notices of appeal and cross-appeal of the judgment and orders. Pending appeal, this court inquired into the timeliness of the cross-appeal, based on our appealability concerns about the judgment and posttrial orders, and we issued an order interpreting the judgment to support the timeliness of both appeals.
In March 2008, Plaintiffs filed a motion to allow additional evidence on appeal, regarding the standing of the Trust to sue and to appeal on contractual theories. We deferred it for decision, and address it in part IIA, post. (§ 909.)
DISCUSSION
I
INTRODUCTION
In their appeal, both the Trust and the Corporation challenge the trial court's key legal and evidentiary rulings, by claiming they were denied an opportunity to present in full their alternative theories of contractual recovery of damages, including a third party beneficiary claim or economic loss on a special relationship theory. (Lucas, supra, 56 Cal.2d 583; J'Aire, supra, 24 Cal.3d 799 at pp. 804-806.) Their arguments vary, depending on the characterization of the different legal capacities that Ryan held during the relevant time periods: personal owner of the property (the contracting party), president and sole owner of the Corporation shares, and trustee of the Trust that has leased its acquired property to the Corporation. Plaintiffs present their major arguments in several ways, including challenges to the rulings on summary adjudication and demurrer, as well as in limine and new trial motions.
In the Contractor's cross-appeal, its arguments about the pretrial offers and the attorney fees provisions of both the construction contract and the subcontract must be reconciled with the rulings to be reached on the merits of the appeal, to identify and verify which were the appropriate prevailing parties. This will include both contract (Civ. Code, § 1717) and statutory interpretation issues. (§ 998.)
To address these various arguments, we first discuss the claims of error on appeal regarding the various rulings that interpreted the contract to disallow a third party beneficiary theory for the Corporation or economic loss damages. We will then turn to the cross-appeal issues concerning attorney fees and costs entitlements. (Pt. III, post.)
II
APPEAL
A. Motion for Summary Adjudication and New
Trial Orders; Evidence on Appeal
The trial court's summary adjudication order dismissed the Corporation's breach of contract and breach of warranty causes of action, finding there was undisputed evidence that the Corporation was not a party to the construction contract nor an owner of the property. The court's order noted that the contract does not indicate that Ryan signed it in her capacity as an agent for the Corporation, nor does it show that the Corporation was a third party beneficiary to the contract, under an objective theory of contractual intent. The court stated the Corporation, as a nonparty to the contract, could not pursue extracontractual damages for wrongful withholding of contractual benefits. However, leave to amend was appropriately granted to attempt to plead such a cause of action. (Soderbergh v. McKinney (1996) 44 Cal.App.4th 1760, 1773.)
The order also denied to Plaintiffs the opportunity to seek tort damages under a strict liability theory, to the extent they were claiming a lost benefit of their bargain, such as reduced value of the Project or costs of repair.
Plaintiffs dispute the merits of these adjudications (except strict liability), and they also address the same issues about third party beneficiary claims and economic loss damages entitlements, in the context of the rulings on the demurrer and the in limine motions. Their briefs on appeal request relief that is very wide-ranging: (1) reversal with directions to establish third party beneficiary or party status to the contract; (2) remand for retrial of any factual issues on privity or third party beneficiary status; or (3) remand for retrial on economic loss damages.
On appeal, it would be possible to consider the legal correctness of those summary adjudication rulings, as subsumed in the judgment, but only to the extent they were not superseded by later pleadings and rulings. (See Certain Underwriters at Lloyd's of London v. Superior Court (2001) 24 Cal.4th 945, 972 [summary adjudications reviewed de novo for any triable issues of material fact].) "In practical effect, we assume the role of a trial court and apply the same rules and standards which govern a trial court's determination of a motion for summary judgment." (Lenane v. Continental Maritime of San Diego, Inc. (1998) 61 Cal.App.4th 1073, 1079.)
In this procedural context, the trial was conducted on the allegations of the operative pleading (the SAC), the scope of which was limited by the ruling on demurrer, regarding the same third party beneficiary and related damages issues. We think the related legal issues raised are most appropriately addressed on review of the demurrer and motions in limine rulings, not the summary adjudication rulings, and will defer that discussion accordingly. The identical issues must be resolved for purposes of evaluating the new trial ruling, and we need not discuss any new trial issues separately, since the parties have not done so.
Nevertheless, the summary adjudication ruling remains relevant for purposes of assessing the validity of the motion for further evidence on appeal. That motion was brought before the opening and responding briefs were filed, and it was deferred for decision to this merits panel. In the motion, which is opposed, Plaintiffs seek to have this court take evidence on appeal regarding the Trust's participation in the original financing and construction process. Specifically, Plaintiffs seek an order admitting as additional evidence an exhibit entitled "draw request certification," signed by Ryan as trustee, to demonstrate whether the Trust is "for all intents and purposes a contracting party." (§ 909.) Plaintiffs believe that we should exercise our discretion to accept this evidence, in support of the lower court's findings, i.e., that the contract between the Trust and the Contractor was breached.
We are aware that the summary adjudication ruling effectively allowed the Trust to appear and to assert the same contract claims as could the original contracting party, Ryan. Evidently, Plaintiffs filed this motion in an abundance of caution, because they assumed that the Contractor would be continuing to challenge the standing of the Trust to enforce the contract. However, that assumption was not borne out, because there is no longer any material dispute on appeal about the standing of the Trust, as current owner of the property, to enforce the construction contract. At least, the briefs do not discuss it at all.
Accordingly, this motion appears to have been mooted by the lack of any issues actually raised on appeal concerning the validity of the Trust's ownership of the property and its standing to sue, and the motion is denied as unnecessary to the resolution of the issues properly presented. (§ 909.)
B. Demurrer: Third Party Beneficiary
1. Parties to Contract
Civil Code section 1559 sets forth the standard for allowing a third party to enforce a contractual provision: "A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it." Several interpretive issues must be addressed in applying that statute, involving whether the promise was stated "expressly" enough for the beneficiary to enforce it, as well as what type of benefit was intended, and whether and by whom such intent was understood. The reason for these concerns is that "[a] third party beneficiary's rights under a contract are not based on the existence of an actual contractual relationship between the parties, but on the law's recognition that the acts of the contracting parties created a duty and established privity between the promisor and the third party beneficiary with respect to the obligation on which the action is founded." (14A Cal. Jur.3d (2008) Contracts, § 305, pp. 195-196.) Then, "the relations of the parties are the same as though the promise had been made directly to the third party. This rule is one of substantive... law, and the putative third party's rights under a contract are predicated on the contracting parties' intent to benefit it." (Ibid., fn. omitted.)
In Super 7 Motel Associates v. Wang (1993) 16 Cal.App.4th 541 (Super 7 Motel), this court acknowledged that even if a parties' agreement confers third party beneficiary status on a person, such a person has no right "other than to collect the benefits the contracting parties agreed to confer on him." (Id. at p. 546.)
In their SAC, Plaintiffs attached a copy of the contract, showing on its face that Ryan had signed it as "owner" without attributing her signature to any particular entity. The contract includes a standardized term that it shall not be construed to create a contractual relationship between persons or entities other than the contracting parties. Plaintiffs nevertheless pled that the agreement was made for the intended benefit of the Corporation, "in that" the Contractor and the Trust "knew" the improvements that were to be constructed for the Trust "were to be used and occupied" by the Corporation, "to operate its preschool under a lease or rental agreement with the [Trust]." The demurrer was sustained without leave to amend for lack of supporting facts.
Ryan, the Corporation's president and sole owner of its shares, did not sign the contract expressly on its behalf. However, she points out that corporations can only act through their human agents and officers. (New York C. & H.R.R. Co. v. United States (1909) 212 U.S. 481, 492-493.) That is not the relevant point, however, because corporations have powers of their own, such as entering into contracts, and the humans who act for them can make that clear. Corporations are fully capable of entering into their own contracts if they wish to do so. (Corp. Code, § 207, subd. (g) [a corporation has the powers of a natural person, including entering into contracts]; 9 Witkin, Summary of Cal. Law (2005 10th ed.) Corporations, § 112, pp. 889-890.) Assuming this was a close corporation, Corporations Code section 158 allows it "to conduct [its] affairs in the manner of partnerships while preserving the advantages of the corporate form. " (9 Witkin, Summary of Cal. Law, supra, Corporations, § 30, pp. 808-809.) Disclosure of a corporate principal by an agent is normally required. (See Firestone v. Wahl (1955) 133 Cal.App.2d 501, 505 [signing a contract as an agent for another requires disclosure of the principal].)
During the relevant time periods, Ryan acted in several legal capacities, as personal owner of the property, trustee of the Trust that leased the property to the Corporation, and corporate owner. (1 Witkin, Summary of Cal. Law, supra, Contracts, § 4, pp. 61-62 [capacity to contract].) Because of those related activities, Plaintiffs' first request for relief is that this court find as a matter of law that the Corporation is actually a party to the contract, in the alternative to finding it was a third party beneficiary of it. We reject this initial theory, because Ryan signed the contract as an individual and did not make any indication she was signing on behalf of the Corporation, as she could easily have done.
We may accept that Ryan's Trust is equivalent to a contracting party, since it is now the owner and lessor of the property, and this seems to be conceded on appeal. Generally, the contract should be interpreted under the circumstances existing at the time of its formation. (Civ. Code, § 1636; Johnson v. Superior Court (2000) 80 Cal.App.4th 1050, 1064 (Johnson); see 1 Witkin, Summary of Cal. Law, supra, Contracts, § 2, pp. 59-61; 14A Cal. Jur.3d, supra, Contracts, § 313, pp. 209-210.) However, California courts do not strictly require contractual "privity" as part of the third party beneficiary concept, so the Corporation might qualify in that alternative manner to enforce the contract, as we next discuss. (See Gilbert Financial Corp. v. Steelform Contracting Co. (1978) 82 Cal.App.3d65, 69, fn. 5 (Gilbert).)
2. Criteria for Third Party Beneficiary Contracts: Incidental
Plaintiffs alternatively seek to have this court direct the trial court to find the Corporation is a third party beneficiary of the contract. Such a request requires us to interpret the contract to determine the clarity of expression of intent of the actual contracting parties (Ryan and the Contractor), and the extent of benefit they intended. Civil Code section 1559 excludes enforcement of a contract by persons who are only incidentally or remotely benefited by it. (Lucas, supra, 56 Cal.2d 583, 590.) "Intended" beneficiaries, who may have enforceable rights under contracts to which they are not parties, may be characterized as either creditor beneficiaries or donee beneficiaries. (Martinez v. Socoma Companies, Inc. (1974) 11 Cal.3d 394, 400-401 (Martinez).) Although it is not entirely clear, Plaintiffs appear to argue that the Corporation should qualify in either category.
To qualify as a creditor beneficiary, "the promisor's performance of the contract will discharge some form of legal duty owed to the beneficiary by the promisee. [Citation.]" (Martinez, supra, 11 Cal.3d 394, 400.) On the other hand, "A person is a donee beneficiary only if the promisee's contractual intent is either to make a gift to him or to confer on him a right against the promisor. [Citation.] If the promisee intends to make a gift, the donee beneficiary can recover if such donative intent must have been understood by the promisor from the nature of the contract and the circumstances accompanying its execution. [Citation.]" (Id. at pp. 400-401.)
"The question of whether a third party is a donee, creditor or incidental beneficiary is a question of construction and the intent must be gathered from reading the contract as a whole under the light of the circumstances under which it was entered [citation]." (Walters v. Calderon (1972) 25 Cal.App.3d863, 870 (Walters).) Although "it is a question of fact whether a particular third person is an intended beneficiary of a contract... where... the issue can be answered by interpreting the contract as a whole and doing so in light of the uncontradicted evidence of the circumstances and negotiations of the parties in making the contract, the issue becomes one of law that we resolve independently." (Prouty v. Gores Technology Group (2004) 121 Cal.App.4th 1225, 1233 (Prouty); see also City of El Cajon v. El Cajon Police Officers' Assn. (1996) 49 Cal.App.4th 64, 70-71 [the reviewing court exercises independent judgment as to the meaning of contractual language, and interprets the written documents de novo, to implement the parties' evident intent, unless credibility of extrinsic evidence is involved in such interpretation].)
Since third party beneficiary status is a matter of contract interpretation, "a person seeking to enforce a contract as a third party beneficiary ' "must plead a contract which was made expressly for his [or her] benefit and one in which it clearly appears that he [or she] was a beneficiary." ' [Citation.]" (Schauer v. Mandarin Gems of California, Inc. (2005) 125 Cal.App.4th 949, 957 (Schauer).) Incidental beneficiaries are not entitled to enforce a contract, because their interests in it are too remote. (Id. at p. 958.) "California cases permit a third party to bring an action even though he is not specifically named as a beneficiary, if he is more than incidentally benefitted by the contract. [Citation.]" (Gilbert, supra, 82 Cal.App.3dat p. 69-70; Shell v. Schmidt (1954) 126 Cal.App.2d 279, 290; see Real Property Services Corp. v. City of Pasadena (1994) 25 Cal.App.4th 375, 383 (RPS) [ruling that a sublessee is an intended third party beneficiary of the original lease, where the lessor expressly agreed to a sublease].)
"[I]t is not every contract for the benefit of a third person that is enforceable by the beneficiary. The fact that he is incidentally named in the contract, or that the contract, if carried out according to its terms, would inure to his benefit, is not sufficient to entitle him to demand its fulfillment. It must appear to have been the intention of the parties to secure to him personally the benefit of its provisions." (Walters, supra, 25 Cal.App.3dat pp. 870-871; italics added.) Here, the Trust as lessor did not agree in the original construction contract (signed by Ryan) that there would be a lease to the Corporation, and the lease issues were handled separately. (See RPS, supra, 25 Cal.App.4th 375, 382-384.)
Merely because the face of the contract refers to the "project" as "the Gifted Preschool," and because the preschool is operated by a corporation, does not qualify the Corporation to enforce the contract, as an expressly intended beneficiary. For example, the Corporation name is plural ("Gifted Schools"), while the Gifted Preschool (occupant) is singular, and not identically named. It is not clear from those facts alone that only the Corporation could ever be the only choice to run the preschool. Nor is it clear that Ryan's different interests in her Trust (as lessor) and her Corporation (as lessee) indicate that the Contractor's performance was obtained by her solely for the benefit of the Corporation. Instead, the Corporation appears to be an incidental beneficiary. The interrelationship of her entities is only one factor for interpretation of the contract's enforceability by the Corporation, and is not dispositive, so we turn to other criteria.
3. Criteria for Third Party Beneficiary Contracts: Intended
We next look to the "expressly made" requirement, and then to the type of benefit to be conferred, to determine whether the third party Corporation is an intended creditor or donee beneficiary entitled to enforcement of the contract. The case law requires us to analyze how the expressed intent of the parties appears on the face of the contract, and how they understood it between each other, under an objective standard. As the Witkin commentators explain, California and the Restatement Second, Contracts, section 2, use the following terms:
" 'A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made. [¶] The person manifesting the intention is the promisor. [¶] The person to whom the manifestation is addressed is the promisee. [¶] Where performance will benefit a person other than the promisee, that person is a beneficiary. [¶] Comment b explains the phrase 'manifestation of intention': It adopts an external or objective standard, and means 'the external expression of intention as distinguished from undisclosed intention.' " (1 Witkin, Summary of Cal. Law, supra, Contracts, § 2, p. 60.)
In Lucas, supra, 56 Cal.2d 583 at page 591, the Supreme Court clarified these requirements for an expression of such an intent: "Insofar as intent to benefit a third person is important in determining his right to bring an action under a contract, it is sufficient that the promisor must have understood that the promisee had such intent. [Citations.] No specific manifestation by the promisor of an intent to benefit the third person is required." (See Walters, supra, 25 Cal.App.3d863, 873; 14A Cal. Jur.3d, supra, Contracts, § 315, pp. 212-214.)
Here, both sides accept that in this construction contract, the proper approach is to identify the Contractor as the promisor (to perform construction) and the Trust as the promisee (owner to receive performance on its property). We examine the record to determine whether the promisor (Contractor) must have understood that the promisee (Trust) had an intent to benefit the Corporation, through its performance. This translates into asking whether the Trust obtained a promise of the Contractor to perform, for the purpose of carrying out some existing obligation that the Trust had to the Corporation, and whether the Contractor must have understood this. The Corporation would qualify as a third party beneficiary entitled to that performance (as a creditor, not an incidental, beneficiary), if there were some underlying obligation giving rise to its third party enforcement rights (or donative intent). (Martinez, supra, 11 Cal.3d 394, 400-401 [where the promisor's performance of the contract discharges some form of legal duty owed to the beneficiary by the promisee, the beneficiary is a creditor beneficiary].)
These contracting parties (Trust and Contractor) created an obligation between themselves to build the Project. Our question is whether they expressly created an agreement between themselves that the Corporation was the intended beneficiary, entitled to enforcement of the construction contract. " ' " 'Expressly,' [as used in the statute and case law,] means 'in an express manner; in direct or unmistakable terms; explicitly; definitely; directly.' " [Citations.] "[A]n intent to make the obligation inure to the benefit of the third party must have been clearly manifested by the contracting parties." ' [Citation.] Although this means persons only incidentally or remotely benefited by the contract are not entitled to enforce it, it does not mean both of the contracting parties must intend to benefit the third party: Rather, it means the promisor... 'must have understood that the promisee... had such intent. [Citations.] No specific manifestation by the promisor of an intent to benefit the third person is required.' [Citations.]" ' " (Schauer, supra, 125 Cal.App.4th at pp. 957-958.)
In Gilbert, supra, 82 Cal.App.3d65, 69-71, the court resolved a third party beneficiary contract dispute by analyzing a subcontract and its relationship to the underlying obligation between the two original contracting parties (general contract). The plaintiff was an owner (Gilbert) which contracted with a general contractor (Appel), to construct the building in question. The general contractor hired a subcontractor for roofing (Steelform), but Steelform did a defective job. The court said: "Clearly, Steelform (the promisor) realized it was assuming Appel's (the promisee) duties for this phase of the construction, and that Gilbert was the ultimate beneficiary of its performance as the owner of the building. Under the... Lucas rules, supra [56 Cal.2d 583], Gilbert would obviously be a creditor beneficiary." (Gilbert, supra, 82 Cal.App.3d65, 70.) The owner Gilbert was an intended third party beneficiary of the (sub-)contract between Appel and Steelform, and Gilbert could sue Steelform on a third party basis for its breach of the implied warranty of fitness. (Id. at p. 69.) The court noted that "the creditor-donee dichotomy as applied to third-party beneficiaries is beginning to vanish," in favor of a broader application of the doctrine. (Id. at p. 71.)
Likewise, in Schauer, the court found that the recipient of an engagement ring (later found to be less valuable than represented at the time of sale) could have third party beneficiary standing in her own right to sue the jeweler for breach of contract, even though the jeweler's contract had been made with her former fiancé; it was important that her former fiancé had contracted to purchase the subject engagement ring "for the sole and stated purpose of giving [it] to plaintiff." (Schauer, supra, 125 Cal.App.4th 949, 958; original italics.) "Under the alleged facts, the jeweler must have understood [former fiancé's] intent to enter the sales contract for plaintiff's benefit. Thus, plaintiff has adequately pleaded her status as a third party beneficiary, and she is entitled to proceed with her contract claim against defendant [jeweler]." (Ibid.) Those circumstances showed an express intent was made known to the jeweler to benefit only the plaintiff, since the engagement ring was purchased for that purpose only, and when the ring turned out to be defective, she could recover damages on a third party basis. The opinion does not find it necessary to explain whether donee or creditor beneficiary status existed. (Id. at pp. 957-958.)
In Walters, supra, 25 Cal.App.3d 863, the court analyzed the enforceability of a plaintiff's deceased father's broken promise to make a will in favor of plaintiff, and found that the plaintiff was unable to recover, as a donee beneficiary. (Id. at p. 870.) The father had made that promise within the context of another agreement with third parties, in 1942, to manage the father's property. "Under the 1942 agreement, decedent is the promisor and the [managers] the promisees of the promise to devise the ranch in question to [plaintiff]. Thus, if [plaintiff] obtained valid, enforceable third party beneficiary rights under the [total] agreement, it must be established that there was also an intent by the [managers] to confer a benefit on him." (Id. at p. 871; original italics.) The father's promise to the son had to be read in context of the "primary purpose" of the agreement as a whole, to have the managers render services to the father. (Id. at p. 872.)
In Walters, supra, 25 Cal.App.3d 863, the father, as the promisor, was "interested only in obtaining whatever consideration the promisee will provide for entering into the contract rather than in benefiting a third party." (Id. at p. 871.) His focus was upon the managers, not upon the son. "But the crucial factor is the intent of the promisee to confer a benefit on the third party.... [citation]." (Ibid.) The father's promise to make the will in favor of the plaintiff son was held unenforceable by the plaintiff on a third party basis, because it lacked the essential element of an intent by the managers to confer a benefit on the son. The son could not show that the managers must have understood they were undertaking the subject contractual duties for his benefit, as opposed to their own benefit. (Id. at pp. 870-873.)
Using all of these principles, our interpretation of the expression of intent of the actual contracting parties (Trust and Contractor), must be that they failed to demonstrate at the time of contracting that the Corporation was an intended third party beneficiary. As far as the record shows, the extent of benefit they intended to the Corporation was incidental only, because the Trust did not have an obligation to support and fund the legally separate Corporation, nor had the Trust expressly promised to give a gift to the Corporation. (See Martinez, supra, 11 Cal.3d at pp. 410-411.) The construction contract was not expressly entered into to provide benefit exclusively to the Corporation, since other legal entities could potentially operate the preschool. The facts that Ryan created a separate corporation to operate a preschool, and they had somewhat different names, casts doubt on whether she personally or as Trustee ever communicated to the Contractor any intent, which was clearly understood, that only this Corporation was to benefit from the Contractor's performance of the work. Any possible identity of interest between Ryan's Trust and her Corporation is not dispositive, since she was legally sophisticated enough to create such separate entities, and they could have entered into their own contracts.
We think that a more clear expression of the parties' intent to benefit the Corporation would be necessary in order to bind the Contractor to contractual liability to it. The Contractor cites Hay v. Hollingsworth (1919) 42 Cal.App. 238, 244 for the proposition that a person generally has the right to choose the party with whom to contract, based on the requirement that an agent must disclose the principal who will be the actual contracting party. This point is well taken, because the Contractor might have negotiated the contract differently if it had understood that it would be performing the contract expressly for the benefit of the Corporation, and if it knew whether the Trust had secured that contractual obligation not for its own benefit, but for that of the Corporation. Different damages theories could be invoked for different obligees, as we next discuss.
Finally, the Trust did not allege anything in its SAC other than general claims that the agreement was made for the intended benefit of the Corporation, "in that" the Contractor and the Trust "knew" the improvements to be constructed for the [Trust] under the agreement "were to be used and occupied by" the Corporation, "to operate its preschool under a lease or rental agreement with the [Trust]." This does not allege more than incidental benefit to the Corporation, and the Trust has not shown why or how the Contractor must have understood it was exposed to any additional contractual liability or damages that this Corporation might incur, such as lost earnings or tuition, in case of construction problems at the property that caused the preschool to become unusable. The trial court correctly sustained the demurrer without leave to amend.
C. Economic Loss Damages
We review the trial court's ruling in limine that excluded evidence for abuse of discretion. (Employers Reinsurance Co. v. Superior Court (2008) 161 Cal.App.4th 906, 919.) Plaintiffs contend that, even assuming the Corporation could not present any contractual theories, the trial court nevertheless erred in granting the Contractor's motion in limine (no. 3) to prohibit presentation of evidence of the Corporation's lost earnings and/or loss of use damages at trial, amounting to $2.3 million or more. Plaintiffs argue that under J'Aire, supra, 24 Cal.3d 799, 804-805, the Corporation qualifies for an exception to the rule against allowing economic loss damages in a noncontract case, because the Corporation is claiming the Contractor negligently performed the contract, and that under these circumstances, the Corporation was in a special relationship that allowed it to recover extracontractual damages. It received only $5,000 as a negligence recovery, apparently for additional maintenance costs that it incurred.
The trial court tentatively decided to exclude such economic loss evidence on the grounds that the Corporation was attempting to pursue the same issues as had previously been barred in the summary adjudication and demurrer rulings. Those rulings had disallowed the Corporation's third party beneficiary contract theories, and decided that the negligence cause of action did not, as a matter of law, support a claim for economic loss.
Argument then took place on all the motions in limine, including related ones brought by the Contractor to challenge the timeliness of some of Plaintiffs' presentation of expert opinion on the standard of care, and other damages issues. There had been a problem with Plaintiffs' expert designation, since it did not indicate the expert would be addressing standard of care issues as well as cost of repair issues. This problem was interrelated with another problem that arose at trial, whether that expert's repair cost estimates could permissibly include economic loss to the Corporation while the school was being fixed, or property damage to other structural components besides the grading. (See Aas v. Superior Court (2000) 24 Cal.4th 627, 636 (Aas) [superseded in other part by statute].) The parties addressed this problem in several motions in limine, including Plaintiffs' claims of mediation confidentiality of those repair cost estimates. The court granted the motion by Plaintiffs to uphold that mediation confidentiality, which mooted some of the dispute.
After further argument, the court revisited the Contractor's motion in limine to prohibit testimony regarding the Corporation's lost earnings or loss of use damages, stating that the tentative ruling was to grant the motion. Counsel for Plaintiffs responded that Plaintiffs would not "be offering such evidence," for the following reason. He said the issue was "probably moot" in light of previous rulings on other motions in limine, including the motion for mediation confidentiality. Counsel then stated that his objection would be withdrawn to that motion, and he thus appeared to be relying on the confidentiality that would be protecting his earlier expert cost estimates and repair recommendations that had been prepared for mediation.
On appeal, Plaintiffs contend there was never any waiver of their evidentiary arguments, because both the motion judge and the trial court had repeatedly rejected any contract damages theories on behalf of the Corporation, and they had also refused to accept Appellants' reliance on J'Aire, supra, 24 Cal.3d 799. Accordingly, Plaintiffs argue the court had effectively excluded an entire category of evidence, such that any further efforts would have been futile. (See Montes v. Superior Court (1970) 10 Cal.App.3d 343, 351.) The Contractor responds that it was proper for the court to exclude this evidence, not only on waiver grounds, but also because Plaintiffs did not provide the court with the substance, purpose, and relevance of the excluded exhibits. (Evid. Code, § 354.) There was no adequate offer of proof regarding this category of damages, to enable the judge to make an informed decision. (Heiner v. KMart Corp. (2000) 84 Cal.App.4th 335, 344.)
The trial court would have been justified in finding that Plaintiffs waived their right to present economic loss evidence on behalf of the Corporation, because if the waiver was conditionally based on earlier rulings, it was not clearly stated by Plaintiffs if any objections were preserved to those rulings. Moreover, there is no offer of proof on the record. It does not appear that the court abused its discretion in ruling as it did at the in limine stage of the proceedings.
Even assuming that some kind of objection to the evidentiary ruling was preserved, based on counsel's references to other rulings, or even because of the breadth of the topic, Plaintiffs still cannot show that the Corporation was entitled to present such economic loss evidence. We have already discussed above why the Corporation could not pursue contractual damages. To the extent it sought to prove lost earnings and other economic damages in tort, it would have had to show that the Contractor's actions constituted not only a breach of contract, but also violated " 'a social policy that merits the imposition of tort remedies.' " (Erlich v. Menezes (1999) 21 Cal.4th 543, 552 (Erlich).)
In Robinson Helicopter Co., Inc. v. Dana Corp. (2004) 34 Cal.4th 979, 989 (Robinson Helicopter), the court relied on Erlich, supra, 21 Cal.4th 543, 551, for the concept "that a party's contractual obligation may create a legal duty and that a breach of that duty may support a tort action. We stated, '[C]onduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law. [Citation.]' " Plaintiffs would claim such a duty to the Corporation here, based on a special relationship to the Contractor, because the Corporation planned to be the ultimate user of the property. In Greystone Homes, Inc. v. Midtec, Inc. (2008) 168 Cal.App.4th 1194 (Greystone), this court explained these related concepts: "[T]he economic loss rule provides that entities generally have no duty to prevent purely economic loss to a potential plaintiff. [Citation.] Under the common law, it is only where a 'special relationship' exists, giving rise to such a duty (J'Aire, supra, 24 Cal.3d at p. 804), that a plaintiff may recover purely economic loss. (See Aas, supra, 24 Cal.App.4th at pp. 644-646.)" (Greystone, supra, at p. 1215.) "Where such a special relationship exists, there exists 'a duty on the part of the defendant to use due care to avoid economic injury to the plaintiff.' [Citation.] Whether such a special relationship and duty of care exists presents a question of law for the court. [Citation.]" (Greystone, supra, at p. 1228.)
In Aas, supra, 24 Cal.4th 627, 636, our Supreme Court concluded that certain homeowners could not recover damages in negligence from the developer, contractor or subcontractors who built their homes, for existing construction defects that had not yet caused either property damage or personal injury. There, the court declined to give a broad interpretation of this statement found in J'Aire, supra, 24 Cal.3d at page 805: " 'Where the risk of harm is foreseeable,... an injury to the plaintiff's economic interests should not go uncompensated merely because it was unaccompanied by any injury to his person or property." (Aas, supra, 24 Cal.4th 627, 645.)
None of those theories assists Plaintiffs in this case. Rather, "A person may not ordinarily recover in tort for the breach of duties that merely restate contractual obligations. Instead, ' "[c]ourts will generally enforce the breach of a contractual promise through contract law, except when the actions that constitute the breach violate a social policy that merits the imposition of tort remedies." ' [Citations.] This court recently rejected the argument that the negligent performance of a construction contract, without more, justifies an award of tort damages. [Citation.] In so doing, however, we reiterated that conduct amounting to a breach of contract becomes tortious when it also violates a duty independent of the contract arising from principles of tort law. [Citation.] " (Aas, supra, 24 Cal.4th 627, 643.)
Plaintiffs believe that they should qualify under the criteria set forth in J'Aire, supra, 24 Cal.3d 799, for determining that a special relationship exists between the parties, so that the Corporation need not show privity of contract and may recover for economic losses, due to the negligent performance of the contract. (Id. at p. 804.) However, they suggest no kind of "harm above and beyond a broken contractual promise." (Robinson Helicopter, supra, 34 Cal.4th 979, 988.)
We decline to decide whether a duty arose based on the application of those special relationship criteria in this case, because of the lack of a meaningful offer of proof to pursue them. In any case, for reasons that are similar to our conclusions on the third party beneficiary theory, it is highly doubtful that the Corporation could bring itself within the special relationship rubric on this record. Rather, this case involves a garden variety construction contract, entered into by sophisticated business persons who should have understood the consequences of their transactions. Plaintiffs have not shown that any reversible legal or evidentiary error occurred before or during trial.
III
CROSS-APPEAL: AWARDS OF ATTORNEY FEES AND COSTS
After the new trial/JNOV arguments, the court heard a number of motions by all sides seeking awards of attorney fees and costs. We first discuss the Contractor's arguments in its cross-appeal that the trial court erroneously denied its motion for a costs and fees award under section 998. We then turn to the arguments regarding the respective prevailing party status of the Trust, the Corporation, the Contractor, and/or the subcontractor, all of which require interpretations of Civil Code section 1717.
A. Contractor's Attorney Fees/Costs Motion v. Plaintiffs; Section 998
Section 998 provides in relevant part that either party may "(b)... serve an offer in writing upon any other party to the action to allow judgment to be taken... in accordance with the terms and conditions stated at that time.... [¶]... [¶] (c)(1) If an offer made by a defendant is not accepted and the plaintiff fails to obtain a more favorable judgment, the plaintiff shall not recover his or her postoffer costs and shall pay the defendant's costs from the time of the offer. In addition,... the court... in its discretion, may require the plaintiff to pay a reasonable sum to cover costs of the services of [defense] expert witnesses...." (§ 998, subds. (b), (c)(1).)
In April 2007, the Contractor made a section 998 offer "to plaintiffs" in the amount of $605,000. (The trial court noted at the hearing that the Contractor had previously made a lesser offer either in 2006 or 2007.) At the time the 2007 offer was made, the summary adjudication and demurrer rulings had already been made. The Contractor's offer stated that $350,000 cash would be paid to "plaintiffs," and the Contractor would waive any claim it was the prevailing party, as against the Corporation, for purposes of contract analysis (based on the earlier rulings), therefore waiving its current attorney fees of $255,000, and any right of set off. The Contractor placed the total value of the offer to compromise at $605,000, and required Plaintiffs to release their claims upon acceptance.
Plaintiffs rejected the offers, and as of the time of trial, were seeking a few million dollars in damages. At trial, the Trust recovered a total of $433,610, and the Corporation recovered $5,000 in negligence. In dealing with Plaintiffs' claims on appeal, we have found no error in the trial court's restriction of the legal theories that could be pursued by the Corporation (no third party beneficiary contract theory allowed, nor related damages issues).
On August 2, 2007, the Contractor's motion requested its fees and costs against all Plaintiffs because "the Plaintiffs" failed to obtain a better result than the Contractor's offer to compromise under section 998. It argued that all Plaintiffs had failed to obtain a better result than was represented by its offer to compromise, so it was entitled to postoffer costs and expert fees of $113,805.96. As against the Corporation, it sought approximately $163,163 attorney fees as well, for a total of $267,868.19.
In its ruling, the trial court determined that the Contractor was not entitled to section 998 costs and fees, because the settlement offer it made was not sufficiently clearly allocated as between the two plaintiffs. (Peterson, supra, 154 Cal.App.4th 498.) The court did not express an opinion on whether the offered waiver of attorney fees and costs was sufficiently clear in amount to constitute a realistic settlement offer.
To evaluate this ruling, we first address the allocation issue, and to the extent necessary, the reasonableness of the amount. (See Thompsonv. Miller (2003) 112 Cal.App.4th 327, 338-339 (Thompson) [reasonableness of offer is left up to sound discretion of trial court; on appeal, abuse of discretion must be shown].) In general, the offeror had the burden of establishing that the offer was sufficiently certain to comply with the requirements of section 998. (Peterson, supra, 154 Cal.App.4th 498, 505-506.) "Application of section 998 to undisputed facts, and the determination of the number of plaintiffs for purposes of section 998, are legal issues we review de novo. [Citation.]" (Id. at p. 505.)
On the allocation issue, we first observe that this offer addresses two Plaintiffs, the Trust and the Corporation. We evaluate on the face of the offer whether it "was apportioned among the offerees and not conditioned on all of them accepting it; and, if this standard was not met, whether the offer was nonetheless valid because the offerees had a unity of interest." (Peterson, supra, 154 Cal.App.4th 498, 505-506.) "A single, lump sum offer to multiple plaintiffs which requires them to agree to apportionment among themselves is not valid." (Santantonio v. Westinghouse Broad. Co. (1994) 25 Cal.App.4th 102, 112 (Santantonio).)
The Contractor mainly contends on the allocation issue that because Ryan is personally in control of both the Trust and the Corporation, the Trust and the Corporation had such a unity of interest that the Contractor's offer to all "plaintiffs" was adequate under statutory standards. This would qualify as an exception to the usual rule that offers should be expressly allocated: "where there is more than one plaintiff, a defendant may still extend a single joint offer, conditioned on acceptance by all of them, if the separate plaintiffs have a 'unity of interest such that there is a single, indivisible injury.' [Citation.]" (Peterson, supra, 154 Cal.App.4th 498, 505.)
In our case, as in Peterson, supra, 154 Cal.App.4th 498, one individual represents several different legal capacities. There, the court rejected Widow Peterson's contention that her three capacities (individual loss of consortium claimant/survivor tort claimant/wrongful death heirship claims) required three separate offers. Although Mrs. Peterson had standing to assert different types of claims, they were all made on her own behalf, and they all arose out of the same injury (her late husband's asbestosis). She remained the same individual party, and she properly represented only one offeree plaintiff for purposes of section 998, such that one offer to her was permitted. (Id. at pp. 505-507.)
Here, the offer was made "to plaintiffs." We have already resolved the legal questions about whether Ryan's Trust and her Corporation could both pursue breach of contract theories, and decided they could not, because the Corporation was neither a party nor an intended third party beneficiary of the construction contract. By the same reasoning, we cannot find that Ryan's Trust and her Corporation had the kind of unity of interest that would have justified a joint offer to them, before trial. (See Peterson, supra, 154 Cal.App.4th 498, 505-507.) The Trust owned the Project and leased it to the Corporation, which occupied it. In the verdict, the Trust received compensation for breach of contract, while the Corporation received negligence damages for additional maintenance that was required due to problems in operating at the site. The two entities had different business interests that were at stake in this case, and therefore different interests in the type of recovery against the Contractor. (Compare Vick v. DaCorsi (2003) 110 Cal.App.4th 206 (Vick) [involving a unity of interest in community property].) They did not have a single, indivisible injury. (Peterson, supra, 154 Cal.App.4th 498, 505.) Extensive litigation took place before trial, to separate the Corporation's legal status from that of the Trust. It was therefore incumbent upon the Contractor to make separate offers to the two Plaintiffs, or at least to indicate that each other's acceptances, if any, would not be conditional.
Instead, this offer is most reasonably read as being conditioned on group acceptance. In Menees v. Andrews (2004) 122 Cal.App.4th 1540, 1544-1546 (Menees), the court set forth a summary of the rules for evaluating the validity of an offer under section 998, where multiple offerees are involved. An offer must be unconditional and must be clearly allocated among the offerees, even where they are jointly represented by the same attorney. (Id. at p. 1546.) Next, the offer must be made in such a manner that the individual offerees may accept or reject it. (Ibid.) "Where an offer is not apportioned between individual offerees, the inference that the offer must be accepted jointly is inherent. [Citation.]" (Id. at p. 1544.) This raises the problem that an offer apparently conditioned on all parties' acceptance of it will run against the statutory purpose of section 998, to best promote the chances of settlement. (Ibid., citing Vick, supra, 110 Cal.App.4th 206, 211.)
In Menees, supra, 122 Cal.App.4th 1540, 1545, the court distinguished the reasoning in Santantonio, supra, 25 Cal.App.4th 102, 113, another case that involved a defense offer to multiple plaintiffs. In Santantonio, supra, at page 113, the majority "rejected the argument that an apportioned offer, which did not address joint versus individual acceptance, was impliedly conditional." (Menees, supra, at p. 1544, fn. omitted.) There, it was an acceptable offer because it specified dollar amounts as to each individual plaintiff, that could be deemed to be payable jointly and severally by the multiple defendants, and thus each offer could have been separately accepted by an individual plaintiff. (Santantonio, supra, at pp. 112-113; but see dissenting opinion by Justice Johnson in Santantonio, supra, at p. 126 ["In my view the section 998 offer... was conditional... because it required acceptance by all three plaintiffs... in a single joint document... served on the attorney who happened to be representing all plaintiffs."].)
In Menees, supra, 122 Cal.App.4th 1540, "the offer was made in a single document, which referred to appellants in the conjunctive. Provided with the offer was another document, the notice of acceptance, which again referred to appellants in the conjunctive and, quite tellingly, provided only one signature line--for the attorney who represented both of them." (Id. at p. 1546.) This led the court to conclude: "We believe the legislative purpose of section 998 is best served in multiplaintiff cases by requiring that section 998 offers be separately prepared and served on individual plaintiffs, allowing each individual the opportunity to accept individually. Because the offer here did not meet this requirement, we find it invalid for the purpose of making Appellants or either of them liable for expert witness fees." (Menees, supra, at p. 1546.) Here too, this offer was insufficiently specific.
At the hearing, the court acknowledged that "Plaintiffs' demands were unreasonable," and that the value of the case "was, in fact, closer to [Contractor's] $250,000 offer that was made either in '06 or '07." The trial court heard disputing versions about the reasonableness and timing of the offers. The trial court did not expressly reach the issue of certainty of the Contractor's offer. Plaintiffs argue that the offer was defective because it cannot be determined objectively whether it is reasonable in amount. The offer included both a dollar sum to "Plaintiffs," and also another sum attributable to the Contractor's proposed waiver of its own attorney fees claim and right of setoff in connection with the pretrial litigation on the motions, regarding the Corporation. The trial court's discretion comes into play when evaluating the reasonableness of an amount offered. (Thompson, supra, 112 Cal.App.4th at p. 339.)
In Valentino v. Elliott Sav-On Gas, Inc. (1988) 201 Cal.App.3d 692, 697 (Valentino), the court explained that because the statutory language "offer" is quite general, "an 'offer' includes all its terms and conditions and must be evaluated in the light of all those terms and conditions. Furthermore, a plaintiff is subject to cost-shifting only if she fails to obtain a judgment 'more favorable' than the value of the statutory offer, again including all its terms and conditions." (Ibid.)
Where some such nonmonetary or other terms of an offer under section 998 are so unclear or complicated that it becomes difficult "to accurately and fairly evaluate the monetary term to decide whether the damage award did or did not exceed the amount offered in settlement of the instant case," then the offer as a whole may be found to be defective, in the court's discretion. (Valentino, supra, 201 Cal.App.3d 692, 698.) A condition to a statutory offer that introduces uncertainty to the offers is disfavored. In Valentino, that condition was a requirement that the plaintiff give up various potential unfiled claims against various defendants, and that condition was deemed to be "an imponderable which makes it impractical if not impossible to accurately and fairly evaluate the offer." (Id. at p. 699.)
Although this order does not specify whether the amount of the proposed waiver of the attorney fees or setoff rights regarding the Corporation was reasonable as an offer, the case of Seever v. Copley Press, Inc. (2006) 141 Cal.App.4th 1550, 1561 indicates that an offer to pay statutory costs according to proof, including attorney fees, is capable of being made certain. However, the terms of this offer as a whole fail to meet the criteria of section 998, as the trial court correctly found, and this order was not an abuse of discretion.
B. Civil Code Section 1717; Applicable Standards/Criteria
De novo review of the trial court's legal conclusions underlying the fees award is proper on appeal. "On review of an award of attorney fees after trial, the normal standard of review is abuse of discretion. However, de novo review of such a trial court order is warranted where the determination of whether the criteria for an award of attorney fees and costs in this context have been satisfied amounts to statutory construction and a question of law. [Citations.] [¶] Stated another way, to determine whether an award of attorney fees is warranted under a contractual attorney fees provision, the reviewing court will examine the applicable statutes and provisions of the contract. Where extrinsic evidence has not been offered to interpret the [contract], and the facts are not in dispute, such review is conducted de novo. [Citation.] Thus, it is a discretionary trial court decision on the propriety or amount of statutory attorney fees to be awarded, but a determination of the legal basis for an attorney fee award is a question of law to be reviewed de novo. [Citation.]" (Carver v. Chevron U.S.A., Inc. (2002) 97 Cal.App.4th 132, 142; Snyder v. Marcus & Millichap (1996) 46 Cal.App.4th 1099, 1102.)
This case went to trial on both breach of contract and negligence theories on behalf of the Trust, while the Corporation presented only a negligence theory. At the posttrial motions for fees and costs, the trial court decided "Plaintiffs" were the prevailing parties, as against the Contractor. (Civ. Code, § 1717.) The legal bills Plaintiffs submitted were for approximately $772,001 total fees incurred. At argument, the court tentatively ruled that $77,200 would be an appropriate attorney fee award, based on the amount of recovery that "Plaintiffs" had obtained, overall. In part, the court reasoned that the Corporation had recovered $5,000 negligence damages, and thus it had a net recovery. (§ 1032, subd. (a)(4).) Later, the trial court issued an order that "fixed the reasonable amount" as a $400,000 award to plaintiffs.
Attorney fees are not recoverable as costs unless a statute or contract expressly authorizes them. (§ 1021; Sessions Payroll Management, Inc. v. Noble Const. Co., Inc. (2000) 84 Cal.App.4th 671, 677 (Sessions).) To the extent the trial court referred to the Corporation's $5,000 negligence damages as a net recovery, this was a correct observation regarding the award of ordinary costs, but did not suffice to justify an award of contractual attorney fees. (§ 1032, subd. (a)(4).) Rather, under the current (1987) version of the major terms of section 1717, as interpreted in Hsu v. Abbara (1995) 9 Cal.4th 863, 873-874 (Hsu), a determination of "prevailing party" for purposes of contractual attorney fees should be made "without reference to the success or failure of noncontract claims. [Citation.] [T]he Legislature deleted the previous definition of 'prevailing party' as the party entitled to recover costs, providing instead that 'the party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract.' Finally, the Legislature added the language... that the trial court 'may also determine that there is no party prevailing on the contract for purposes of this section.' " (Ibid.; italics added.)
In Hsu, supra, 9 Cal.4th 863, 876, the Supreme Court clarified that "when the decision on the litigated contract claims is purely good news for one party and bad news for the other--the Courts of Appeal have recognized that a trial court has no discretion to deny attorney fees to the successful litigant. Thus, when a defendant defeats recovery by the plaintiff on the only contract claim in the action, the defendant is the party prevailing on the contract under section 1717 as a matter of law. [Citations.]" (Hsu, supra, at p. 876.)
Hsu, supra, 9 Cal.4th 863, 876, establishes that for interpretation of Civil Code section 1717 and its term "party prevailing on the contract," the trial court must "compare the relief awarded on the contract claim or claims with the parties' demands on those same claims and their litigation objectives as disclosed by the pleadings, trial briefs, opening statements, and similar sources. The prevailing party determination is to be made only upon final resolution of the contract claims and only by 'a comparison of the extent to which each party ha[s] succeeded and failed to succeed in its contentions.' [Citation.]" (Hsu, supra, at p. 876.)
The principles set out in Hsu, supra, 9 Cal.4th at page 876, were expanded upon by the court in In re Estate of Drummond (2007) 149 Cal.App.4th 46, 51 (Drummond), with an analysis of the practical and pragmatic aspects of the prevailing party determination. Since attorney fees awards cannot be made before a "final resolution" of the contract claims, the thrust of the Hsu decision "is that status as the 'party prevailing on the contract' is ascertained not by technicalities of pleading and procedure but by a pragmatic assessment of the parties' ultimate positions vis-à-vis their litigation objectives as reflected in pleadings, prayers, and arguments. [Citation.]" (Drummond, supra, at p. 51; see Hsu, supra, at p. 877 ["in determining litigation success, courts should respect substance rather than form, and to this extent should be guided by 'equitable considerations' "].) Although the trial court has discretion under Civil Code section 1717 to determine which party prevailed on a contract, that discretion is not unlimited, and must comply with the statutory terms. (Drummond, supra, at p. 50.)
Likewise, rigid interpretations of the term "prevailing party" under various costs provisions have generally been discouraged, and the courts have looked to "which party had prevailed on a practical level... the trial court must determine who is the prevailing party, and... the court's ruling should be affirmed on appeal absent an abuse of discretion." (Heather Farms Homeowners Assn. v. Robinson (1994) 21 Cal.App.4th 1568, 1574 (Heather Farms).)
Several sets of issues are presented regarding any entitlement of the Trust and/or the Corporation and/or the Contractor to an award of contractual prevailing party fees. We next discuss those issues separately as to those parties. (See pt. IIIF, post, regarding the subcontractor.)
C. Analysis: Each "Plaintiff's" Attorney Fees Entitlement v. Contractor; Civil Code Section 1717
We begin by noting that the language of the subject attorney fees clause was somewhat garbled in the contract, but the parties now agree that the gist of it reads as follows: "If any action... is brought to enforce or interpret the provisions of this agreement, the prevailing party shall be entitled to reasonable attorneys fees in addition to any other relief...." (Actually, the original language says that if an action is brought to "enforce or interest the provisions of this agreement [sic]," then a fees award may be made to the prevailing party.) In either case, this terminology appears to be fairly narrow in scope, regarding the subject of "any action," because it refers to contract enforcement or contract interpretation, and not to the resolution of "any dispute" that might "arise" from the agreement. (See Thompson, supra, 112 Cal.App.4th 327, 335-337 [fees provision is "broader" when referring to "any dispute under the agreement"; or, narrower when referring to "any action to enforce the terms" of a contract].)
In challenging this order that Plaintiffs, collectively, were entitled to an award of attorney fees as prevailing parties, the Contractor's cross-appeal points to the Trust's recovery of $203,610 on its contract claim and the Corporation's recovery of $5,000 on its negligence claim, to argue that as "Plaintiffs," they were not necessarily both "prevailing parties" on the contract. (Civ. Code, § 1717, subd. (a).) We first take note that the Trust's additional recovery of $230,000 investigative costs is correctly attributed to tort damages, as part of repair costs. (Stearman, supra, 78 Cal.App.4th 611, 625 [allowing plaintiff homeowners to recover as tort damages the fees charged by the professionals who investigated the problems in order to formulate an appropriate repair plan].)
In support of its position that it is actually the "overall victor" in this case, the Contractor refers to statements by the trial court at the hearing on Plaintiffs' motion for fees that Plaintiffs had not fully achieved their "litigation objectives." That is, "Plaintiff[s] wanted two million. They got $203,000." The court further acknowledged that "Plaintiffs' demands were unreasonable," and that the value of the case "was, in fact, closer to [Contractor's] $250,000 offer that was made either in '06 or '07."
Nevertheless, the court decided to award fees to "Plaintiffs." The trial court explained its decision to award fees as follows: (1) "Plaintiffs have the laboring oar in putting... cases together"; (2) this case was a "complex case"; (3) "the attorneys' fees in and of themselves are reasonable... based on the complexity of the case and the amount of time it was worked on, three and a half years"; (4) "there was no offer on this case for... two and a half or three years"; and (5) "plaintiff did receive an unqualified victory if you count noses" (the jury's verdict was unanimous). The trial court thus allowed a fees award to "Plaintiffs" of $400,000.
In reviewing this ruling, we seek to determine if the statutory criteria for an award of contractual prevailing party attorney fees have been met, as to each Plaintiff, under Civil Code section 1717, and as that section is properly read together with sections 1021 and 1032. If the fees award is well grounded in the statutory language, our inquiry must also include an analysis of whether the court's exercise of discretion is well supported by the record regarding the amount of fees awarded. According to City of Santa Monica v. Stewart (2005) 126 Cal.App.4th 43, 83, when reviewing a discretionary decision, the appellate court considers the entire record with particular attention to the trial court's stated reasons for the fees ruling, to see if the proper standards of law were applied. (See Scott, supra, 20 Cal.4th 1103, 1114 [entitlement to attorney fees under a contractual fees provision requires interpretation not only of the fees provision but also the complex interaction of several statutes affecting a party's contractual right to attorney fees].)
First, it is clear to us that the Trust was entitled to an award of attorney fees as prevailing party on the contract, against the Contractor. (Civ. Code, § 1717.) Again as stated in Hsu, supra, 9 Cal.4th 863, 876, when a trial court interprets Civil Code section 1717 and its term "party prevailing on the contract," the trial court must "compare the relief awarded on the contract claim or claims with the parties' demands on those same claims and their litigation objectives as disclosed by the pleadings, trial briefs, opening statements, and similar sources. The prevailing party determination is to be made only upon final resolution of the contract claims and only by 'a comparison of the extent to which each party ha[s] succeeded and failed to succeed in its contentions.' [Citation.]" (Hsu, supra, at p. 876.)
Under these standards, as a matter of law, the Trust qualifies as the prevailing party in the action on the contract. It recovered significant contract damages, albeit less than it claimed. It is not necessary for us to consider whether settlements with other defendants or tort damages contributed to the Trust's contract victory. (See Stearman, supra, 78 Cal.App.4th at pp. 624-625; see Wakefield v. Bohlin (2006) 145 Cal.App.4th 963, 980-983 (Wakefield) [discussing whether settlement funds should affect a prevailing party determination for cost purposes].) The Contractor is not "the overall victor," as it claims, simply because the Trust did not obtain as much as it wanted, even when the discretion of the trial court in evaluating success is taken into account. We should decide on status as the " 'party prevailing on the contract'... not by technicalities of pleading and procedure but by a pragmatic assessment of the parties' ultimate positions vis-à-vis their litigation objectives as reflected in pleadings, prayers, and arguments. [Citation.]' " (Drummond, supra, 149 Cal.App.4th at p. 51.) The Trust won damages that are not inconsiderable, and it is entitled to contractual attorney fees, even without any "beefing up" of the contract damages award by adding on the settlement or tort amounts.
Next, as to the Corporation plaintiff, it was included in the $400,000 attorney fees award, but it is unclear on what basis. The court in Heather Farms, supra, 21 Cal.App.4th 1568, 1572, analyzed a number of statutory costs provisions, and concluded that they must each be interpreted independently. The court commented, the proposition "that a litigant who prevails under the cost statute is necessarily the prevailing party for purposes of attorney fees, has been uniformly rejected by the courts of this state. [Citation.] Furthermore, Code of Civil Procedure section 1032, subdivision (a) only defines ' "[p]revailing party" ' as the term is used 'in [that] section.' It does not purport to define the term for purposes of other statutes." (Heather Farms, supra, at p. 1572.) We must now examine the contract to determine if the Corporation, as a potential third party beneficiary, would have been entitled to enforce the contractual attorney fees clause. It was not a signatory to the contract, but seeks to take the benefit of the attorney fees clause.
For our purposes here, we must take into account that the Corporation was attempting to sue the Contractor on the construction contract "as if the corporation were a party to it." (Reynolds, supra, 25 Cal.3d at p. 128.) However, it was not allowed to do so, and those rulings were proper. We next analyze whether the trial court could properly interpret the attorney fees clause as allowing the Corporation to be deemed to be one of the prevailing parties in contract.
We find guidance in Super 7 Motel, supra, 16 Cal.App.4th 541, 546-547, for interpreting the alleged scope of benefits of a third party beneficiary, under the contract, including any attorney fees clause. There, this court set aside a contractual attorney fees award to a defendant real estate broker who had successfully defended fraud claims, brought against him by the buyer. The broker was unsuccessfully seeking to qualify under the buy-sell contract as either a party to it, or a third party beneficiary of it. In connection with analyzing the type of benefits that are conferred by the parties' agreement upon a putative third party beneficiary, this court observed that such a third party beneficiary has no right "other than to collect the benefits the contracting parties agreed to confer on him." (Id. at p. 546.) We concluded in that case that the broker (who was seeking to enforce an attorney fees clause between a contractual buyer and seller) was not a party to the underlying property sale contract, "either factually or as a matter of third party beneficiary law, and hence cannot invoke the attorney fee clause." (Id. at p. 547.) Also, there was a separate attorney fees clause in the broker's separate commission agreement, so it would have been anomalous to ignore that more specific provision in favor of the underlying contract provision. (Id. at p. 546.)
In Super 7 Motel, it did not make any difference to the fees questions that a third party real estate broker may be a proper party to a rescission claim arising out of a purchase contract entered into by others, because any liability on the part of the broker in such a rescission claim "springs from his own fraud, not from a contract to which he was not a party. Since a tort claim for damages carries no award of attorney fees [citation], [the broker] would not have been liable to appellant for fees, and hence... may not recover his fees under Civil Code section 1717." (Super 7 Motel, supra, 16 Cal.App.4th 541, 550.)
The case before us does not include any such fraud or rescission allegations, but with respect to the relationship between our contracting party Contractor, and the alleged third party beneficiary Corporation, the Super 7, supra, 16 Cal.App.4th 541, attorney fees analysis is nevertheless instructive. This analysis interprets the contract and its attorney fees provision by, first, determining whether the nature of the claims asserted by the party seeking fees falls within the intended scope of the attorney fees clause (the "claims issue"). Second, we examine the contract to determine if the parties to the lawsuit were also parties to the attorney fees clause that covered the disputed claims (the "parties issue"). (Id. at p. 545.) There, the attorney fees clause referred to "any action or proceeding arising out of this agreement," a fairly broad clause. (Id. at p. 544.) We acknowledged that even a nonsignatory to the contract may assert coverage by the attorney fees clause, where a reciprocal right would exist if the nonsignatory were held liable on the contract. (Reynolds, supra, 25 Cal.3d at pp. 128-129.) However, in the Super 7 Motel case, the broker was not entitled to enforce the underlying contract as a nonsignatory defendant, to seek attorney fees, because among other things, that would have obviated his own separate attorney fees clause, and he was not a third party beneficiary of the sale contract. (Super 7 Motel, supra, at pp. 545-547.)
In FDIC, supra, 167 Cal.App.4th 333, 338, this court decided a similar issue of entitlement to attorney fees, where the results in litigation were mixed. After the defendant Dintino obtained summary adjudication of the plaintiff Bank's breach of contract cause of action brought against him, the matter went to trial on damages for the Bank on its causes of action against Dintino for unjust enrichment and money lent. The court awarded the Bank unjust enrichment damages in the amount of $268,177.61, plus prejudgment interest of $147,007.30. The court subsequently denied Dintino's motion for an award of attorney fees incurred in defending against the Bank's breach of contract cause of action. On appeal, this court relied on Hsu, supra, 9 Cal.4th at page 877, to hold:
"In this case, the only contract claim alleged by Bank was its breach of contract cause of action based on Dintino's alleged breach of the [Contract/Note]. In granting Dintino's motion for summary adjudication on that cause of action based on the section 726 one-action rule, the trial court gave Dintino a simple, unqualified victory on the only contract cause of action. [Citation.] Accordingly, Dintino was entitled to an award of attorney fees incurred in defending against that cause of action pursuant to the [Contract/Note's] attorney fee provision and Civil Code section 1717. [Citation.] As Dintino asserts, had Bank prevailed on that cause of action, it would have been entitled to an award of its attorney fees as the prevailing party on the contract. [Citation.] Therefore, Dintino, as the prevailing party on the contract, is entitled to the same right to attorney fees pursuant to Civil Code section 1717." (FDIC, supra, 167 Cal.App.4th at pp. 357-358, fn. omitted.)
In FDIC, supra, 167 Cal.App.4th 333, we concluded, "The trial court could not properly consider Bank's success on its noncontract causes of action (e.g., unjust enrichment cause of action) in making its determination of which party, if any, prevailed on the contract cause of action. [Citation.] In so doing, the trial court erred. Accordingly, the trial court erred by denying Dintino's motion for an award of attorney fees incurred in successfully defending against Bank's breach of contract cause of action." (Id. at p. 359, fn. omitted.)
Here too, the Corporation cannot take advantage of the contractual attorney fees clause as a "prevailing party," for purposes of seeking a fees award, when the Corporation prevailed only in negligence. First, the nature of the claim that was properly asserted by the Corporation does not fall within the intended scope of the attorney fee clause (the "claims issue"), because negligence recovery was not based on the contract. The recovery in negligence justifies an award of ordinary costs, not contractual fees under Civil Code section 1717. (§ 1032, subd. (a)(4) [" 'Prevailing party' includes the party with a net monetary recovery..."]; see Wakefield, supra, 145 Cal.App.4th at p. 973 ["different statutes govern recovery of fees in the two types of actions"].)
Also, this attorney fees clause refers to enforcement or interpretation of the agreement, not to broader types of disputes that "might arise out of the agreement." (See Thompson, supra, 112 Cal.App.4th 327, 335-337.) The Corporation attempted to sue on the agreement, but when those efforts failed, it lost its basis to invoke the attorney fees clause. The Corporation's success on its noncontract causes of action does not give it a contractual right to attorney fees. (FDIC, supra, 167 Cal.App.4th at p. 358.)
Under Drummond, supra, 149 Cal.App.4th 46, a pragmatic approach to the "prevailing party" determination is recommended. This brings us back to the statement in Hsu, supra, 9 Cal.4th 863, that "when the decision on the litigated contract claims is purely good news for one party and bad news for the other--the Courts of Appeal have recognized that a trial court has no discretion to deny attorney fees to the successful litigant. Thus, when a defendant defeats recovery by the plaintiff on the only contract claim in the action, the defendant is the party prevailing on the contract under section 1717 as a matter of law. [Citations.]" (Hsu, supra, at p. 876.) The Contractor defeated the Corporation's contract claims.
Likewise, as to the "parties issue," this contractual attorney fees clause merely refers to an action brought "to enforce an interest in the provisions of the agreement," or "to enforce or interpret the provisions of the agreement." (See Super 7, supra, 16 Cal.App.4th at pp. 546-547.) Only the parties are entitled to pursue such relief, successfully, or their intended beneficiaries. Of course, the Corporation did so, but unsuccessfully. For these reasons, the trial court erred by including the Corporation in the prevailing party attorney fees award.
We are aware that in some cases, successful third party beneficiary contract claimants can recover attorney fees under the disputed contract's attorney fees clause, under reciprocal principles. That problem was discussed in RPS, supra, 25 Cal.App.4th 375, 377, in which the court addressed the entitlement to attorney fees as between "a signatory to a contract with an attorney fee provision, who is sued by a nonsignatory for breach of that contract," where the nonsignatory was seeking recovery pursuant to third party beneficiary status, but failed to obtain recovery, so that the signatory was the prevailing party. In RPS, the City was the lessor of property to a third party lessee, which then subleased certain premises to the plaintiff, RPS. RPS was unable to occupy the property, allegedly due to the City's breach of the main lease, and it sued the City on a third party beneficiary theory (as a nonsignatory). The City prevailed at trial, and sought to recover attorney fees against RPS, under the main lease's attorney fees clause, to which RPS was not a party.
In analyzing the facts in RPS, the court decided that the City, as the prevailing signatory defendant, was entitled to recover attorney fees from the nonsignatory plaintiff RPS, because of the operation of the reciprocal provisions in Civil Code section 1717. The important analysis was whether RPS, if it had been able to prevail at trial on its third party beneficiary contract theory, would have been entitled to an award of attorney fees from the City. (RPS, supra, 25 Cal.App.4th 375, 379-380.)
In applying the authority of Reynolds Metal Co., supra, 25 Cal.3d 124, the court in RPS noted that its rationale has been applied "in actions by a nonsignatory plaintiff seeking to enforce a contract against a signatory defendant. [Citation.]" (RPS, supra, 25 Cal.App.4th 375, 380.) The court said the following rule applied to cases involving nonsignatories to a contract with an attorney fee provision:
"A party is entitled to recover its attorney fees pursuant to a contractual provision only when the party would have been liable for the fees of the opposing party if the opposing party had prevailed. Where a nonsignatory plaintiff sues a signatory defendant in an action on a contract and the signatory defendant prevails, the signatory defendant is entitled to attorney fees only if the nonsignatory plaintiff would have been entitled to its fees if the plaintiff had prevailed." (Id.at p. 382)
In RPS, supra, 25 Cal.App.4th 375, 382-384, the court held that the type of contract and attorney fees clause involved there would allow the nonsignatory sublessee, who was suing the signatory landlord under a third party beneficiary theory for breach of a lease, to have a potential for prevailing in the action on the contract, because there was a close enough nexus or connection between the nonsignatory sublessee (as an intended third party beneficiary), and the original main lease. (Id. at p. 383 [settled law allowed sublessee to qualify as a third party beneficiary to the implied covenant of quiet enjoyment in the original lease, "if a lessor has expressly agreed to a sublease"].) In RPS, "[T]he [main] lease expressly provided for RPS to be the sublessee who would operate the [premises], thereby establishing a nexus between RPS and the City." (Ibid.) Thus, "Where there is a sufficient nexus between the lessor and sublessee, a nonsignatory sublessee is entitled to enforce an attorney fee provision in the lease as a third party beneficiary against a signatory landlord. [Citations.]" (Ibid.)
In Loduca v. Polyzos (2007) 153 Cal.App.4th 334, 343-344, the court held that a homeowner was indisputably a third party beneficiary to the subcontract between the homeowner's general contractor and a subcontractor, who was to put in cabinetry at the home. When the subcontractor did not perform adequately, the homeowner sued on the subcontract, and recovered damages. The attorney fees clause in the subcontract was held to be enforceable by the homeowner, because the clause did not operate to restrict any particular party from bringing suit on the contract (i.e., "If a court action is brought, prevailing party to be awarded attorneys fees and collection costs...."). (Id. at p. 343.) The court said, "Nowhere does the contract impose any limitation on third party rights.... Under these circumstances, it is apparent [the parties to the subcontract] intended [homeowner's] enforcement right to include a right to attorney fees." (Id. at p. 344.) Both the benefits and burdens of the contract applied. (Id. at p. 345.)
Under the test stated in RPS, supra, 25 Cal.App.4th 375, there is not a close enough connection between the Corporation (a tenant) as a potential third party beneficiary of the owner's (Ryan's or Trust's) contract, and the Contractor, in order for the Corporation to be allowed to sue the Contractor for breach of contract, or to recover contractual attorney fees from it. Instead, the Corporation prevailed against the Contractor only in negligence. Although the trial court found that the Corporation was a prevailing party because it had a net monetary recovery, that tort recovery would only qualify it for an award of ordinary costs under section 1032, subdivision (a)(4). (Wakefield, supra, 145 Cal.App.4th at pp. 972-977; FDIC, supra, 167 Cal.App.4th at pp. 357-358.) The trial court erred by including the Corporation in the contractual prevailing party attorney fees award to the "Plaintiffs," under Civil Code section 1717 and its contract theory.
Since the Corporation has no contractual attorney fees entitlement, it is somewhat problematic whether the Contractor must nevertheless have a reciprocal right against the Corporation under the contractual attorney's fees clause. (RPS, supra, 25 Cal.App.4th at pp. 380-384.) Of course, the Contractor was forced to incur fees to defend against those contract-based allegations. We now turn to a consideration of whether the Contractor is entitled to enforce the attorney fees clause against the nonsignatory Corporation, after it unsuccessfully asserted it was a potential third party beneficiary of the underlying contract.
D. Analysis: Contractor's Attorney Fees Motion v. Corporation; Civil Code Section 1717
The attorney fees clause before us reads essentially as follows: "If any action... is brought to enforce or interpret the provisions of this agreement, the prevailing party shall be entitled to reasonable attorneys fees in addition to any other relief...." We are treating this as not a particularly broad form of attorney fees clause, as stated above, because it refers to contract enforcement or contract interpretation, and not to the resolution of "any dispute" that might "arise" from the agreement. (See Thompson, supra, 112 Cal.App.4th 327, 335-337.)
This portion of the cross-appeal seeks reversal of the order denying the Contractor's request for contractual attorney fees from the Corporation. The Contractor claims it is entitled to such an award, because it defeated the Corporation's claims of third party beneficiary rights in the contract. We inquire whether a contractual or reciprocal right to attorney fees exists on behalf of the Contractor, as against a nonsignatory like the Corporation.
In Sessions, supra, 84 Cal.App.4th 671, 678-679, the court outlined those situations in which a contractual attorney fees provision must be read as ensuring mutuality of remedy for attorney fees claims. Even when the contract provides the right to recover attorney fees to one party but not to the other, a reciprocal right is read into it. (Santisas, supra, 17 Cal.4th at pp. 610-611.) Next, "an otherwise unilateral right [is] reciprocal when a defendant sued on a contract with a provision awarding attorney fees to the prevailing party defends by successfully arguing the inapplicability, invalidity, unenforceability, or nonexistence of that contract." (Sessions, supra, at p. 678; original italics.) The court then quoted from Santisas:
"Because these arguments are inconsistent with a contractual claim for attorney fees under the same agreement, a party prevailing on any of these bases usually cannot claim attorney fees as a contractual right. If section 1717 did not apply in this situation, the right to attorney fees would be effectively unilateral--regardless of the reciprocal wording of the attorney fee provision allowing attorney fees to the prevailing attorney--because only the party seeking to affirm and enforce the agreement could invoke its attorney fee provision. To ensure mutuality of remedy in this situation, it has been consistently held that when a party litigant prevails in an action on a contract by establishing that the contract is invalid, inapplicable, unenforceable, or nonexistent, section 1717 permits that party's recovery of attorney fees whenever the opposing parties would have been entitled to attorney fees under the contract had they prevailed." (Santisas, supra, 17 Cal.4th at p. 611.)
In the third party beneficiary context, these reciprocity rules of Civil Code section 1717 have been applied " 'in actions involving signatory and non-signatory parties.' " (Sessions, supra, 84 Cal.App.4th at p. 678, citing RPS, supra, 25 Cal.App.4th at p. 380.) "Where a nonsignatory plaintiff sues a signatory defendant in an action on a contract and the signatory defendant prevails, the signatory defendant is entitled to attorney fees only if the nonsignatory plaintiff would have been entitled to its fees if the plaintiff had prevailed." (RPS, supra, at p. 382.)
As those rules apply, we seek to determine whether the nonsignatory Corporation would have been entitled to an award of attorney fees if it had prevailed on the contract issues, as against the Contractor. The attorney fees clause in the contract effectively refers to a prevailing party in "any action... to enforce or interpret the provisions of this agreement...." The Trust's tenant, the Corporation, pursued such legal arguments to seek third party beneficiary status. Those efforts qualified as seeking enforcement or interpretation of the agreement within the meaning of the attorney fees clause, and if the Corporation had succeeded, it could have invoked the fees clause. Of course, the Corporation was being operated by the same person as the Trust, and accordingly, there is no possibility that there was any lack of knowledge of the exposure to attorney fees liability, if the Corporation turned out to be unsuccessful. We need not disregard our previous findings that the Corporation and the Trust were legally separate entities, in order to acknowledge that during the contract-based litigation, the Plaintiffs and their principal had imputed knowledge of potential exposure to liability for contractual fees here.
Under the test set forth in Super 7 Motel, supra, 16 Cal.App.4th 541, the nature of the claims asserted by the party seeking fees (the Contractor) fell within the intended scope of the attorney fees clause (interpretation of the contract). Second, the Contractor was a party to the lawsuit, and a party to the attorney fees clause that covered the disputed claims. Because the Corporation was asserting party status regarding the contract, it presumably was seeking to bring itself within the attorney fees clause as well, should it prevail. Reciprocal principles indicate that it knowingly exposed itself to liability under the contract on the attorney fees provisions, by asserting full contractual rights. Both the benefits and burdens of the contract applied. (Loduca v. Polyzos, supra, 153 Cal.App.4th 334, 343-345.)
Accordingly, the Contractor is entitled to assert "prevailing party" status on the contract theories, within the meaning of the reciprocal attorney fees clause, to compensate it for the expensive litigation required to interpret the contract. Otherwise, the Corporation would be able to assert a "heads I win, tails you lose" position, by being able to invoke the attorney fees clause if it prevailed as a third party beneficiary, while otherwise still being able to claim nonparty status, as well as overall prevailing party on tort theories, so as to resist being liable for attorney fees assessments.
The only theoretical problem in allowing the Contractor to recover under the contract's attorney fees clause would arise if any anticipated third party beneficiary rights (in the Corporation) were lesser in scope than the anticipated entitlement to contract benefits, such as if the attorney fees clause were never intended by the parties to benefit any potential third party beneficiary. (See Super 7 Motel, supra, 16 Cal.App.4th 541 at pp. 545-547.) However, under FDIC, supra, 167 Cal.App.4th 333, there is no problem in this case that the Contractor defendant defeated the third party contract theories at the pretrial stage regarding the Corporation, for purposes of interpreting the attorney fees clause. Although the Contractor remains liable to pay contract damages to the Trust, the "prevailing party on the contract" determination remains separate as to the two Plaintiffs. That is, the negligence damages awarded to the Corporation do not enter into the equation for purposes of applying Civil Code section 1717 contractual attorney fees rules. (FDIC, supra, at p. 358 ["The trial court could not properly consider Bank's success on its noncontract causes of action (e.g., unjust enrichment cause of action) in making its determination of which party, if any, prevailed on the contract cause of action."].)
Under Drummond, supra, 149 Cal.App.4th 46, and Heather Farms, supra, 21 Cal.App.4th 1568, a pragmatic approach to the "prevailing party" determination is endorsed. Within the meaning of Hsu, supra, 9 Cal.4th 863, 876, the Contractor essentially obtained on the Corporation's contract theories "purely good news for one party and bad news for the other." (Ibid.) "Thus, when a defendant defeats recovery by the plaintiff on the only contract claim in the action, the defendant is the party prevailing on the contract under section 1717 as a matter of law. [Citations.]" (Hsu, supra, at p. 876.) The Contractor is the prevailing party on the contract theories unsuccessfully asserted by the Corporation. Civil Code section 1717 therefore requires that the trial court, in making an attorney fees award, distinguish between the Corporation's unsuccessful contract claim and the successful ones of the Trust, as we next discuss.
E. Analysis: Exercise of Discretion in Making Attorney Fees Award; Civil Code Section 1717
"Where a cause of action based on the contract providing for attorney's fees is joined with other causes of action beyond the contract, the prevailing party may recover attorney's fees under [Civ. Code] section 1717 only as they relate to the contract action." (Reynolds, supra, 25 Cal.3d at p. 129.) However, under Civil Code section 1717, attorney fees need not be apportioned when they were incurred for representation on an issue common to both a cause of action in which fees are proper, and one in which they are not allowed. (Reynolds, supra, at pp. 129-130.)
The trial court relied on this rule, stating in its order:
"If the fees were incurred for representation on an issue common to both the contract and tort causes of action, then it follows the defendant is not the prevailing party because the [Corporation] obtained a $5,000 judgment in its favor, which would make it a prevailing party by reason of having a net monetary recovery. [¶] On the other hand, 'Apportionment of a fee award between fees incurred on a contract cause of action and those incurred on other causes of action is within the trial court's discretion.... [Citation.]' [Citation.] Contractor presented no evidence or suggestion as to how the court could or should apportion the fees. The court declines to undertake its own review of the billing records to parse out the fees associated solely with the contract issue."
Our next question is whether the $400,000 attorney fees award to "Plaintiffs" can represent an appropriate exercise of discretion, on this record, where the "Plaintiffs" recovered on different causes of action. In general, the trial court was justified in stating that apportionment of fees between contract and other causes of action was allowed. However, the court erred in concluding that the common issues predominated here, in light of the pretrial disposition of the third party beneficiary theories against the Corporation. Since trial was conducted using the theoretical distinction between the Trust's and the Corporation's claims, the court should have preserved and upheld that distinction in this attorney fees context.
In the ruling, the court stated that since the Contractor had presented no evidence or suggestion as to how the court could or should apportion the fees, "The court declines to undertake its own review of the billing records to parse out the fees associated solely with the contract issue." This shows a recognition that such an allocation could have been appropriate, based on the common issues among tort and contract, and based on the evidence presented. Indeed, the court apparently did make such an allocation, sua sponte, when it awarded $400,000 attorney fees to the "Plaintiffs," who had originally requested $772,001 attorney fees, and when the court increased the amount from its tentative ruling.
"A trial court's exercise of discretion is abused only when its ruling ' "exceeds the bounds of reason, all of the circumstances before it being considered." ' [Citation.]" (Gonzales v. Personal Storage, Inc. (1997) 56 Cal.App.4th 464, 479.) The circumstances here included closely intertwined causes of action, closely related Plaintiffs, and extensive pretrial litigation to identify the theories properly attributable to each. Once the verdict was rendered and upheld after the new trial motion, the Trust had prevailed on contract and negligence theories and the Corporation had prevailed in negligence. Both are deemed to be prevailing parties, but under different statutory schemes. (Wakefield, supra, 145 Cal.App.4th at pp. 973-978.)
This record sufficiently shows the trial court abused its discretion by not apportioning the attorney fees award to represent the success of the Trust on contract, but the lack of success of the Corporation on contract. The Contractor was entitled to a fees award as well, against the Corporation. We will uphold an exercise of discretion in such matters only if the trial court's findings have the requisite measure of support in the record. We do not substitute our conclusions for those of the trial court, but we do require that these attorney fees awards take into greater account the effect of the previous rulings in the case, including the summary adjudication and demurrer orders, as they were subsumed in the judgment. (See Erickson v. R.E.M. Concepts, Inc. (2005) 126 Cal.App.4th 1073, 1085-1086.)
On remand, the trial court must conduct such appropriate further proceedings as will make a proper allocation of contractual attorney fees to the prevailing Trust Plaintiff, exclusive of the Corporation's legal representation. Additionally, the Contractor qualifies as the prevailing party on the Corporation's losing contract theories, and the court should make an appropriate attorney fees award accordingly, for the fees incurred during the pretrial motion and demurrer proceedings.
In Scott, supra, 20 Cal.4th 1103, 1114, the Supreme Court indicated that these various fees and costs provisions must be read together and reconciled. Along those lines, once the respective attorney fees entitlements are decided, the trial court may allow any appropriate offsets of ordinary costs as between the Contractor and the Corporation on the tort theory of negligence, on which the Corporation was the prevailing party. (§ 1032, subd. (a)(4); see Heather Farms, supra, 21 Cal.App.4th 1568, 1572-1574.)
Although the Contractor concludes its briefs on appeal by generally requesting attorney fees for services rendered on appeal, that issue has not been presented to us in any detail and we decline to express any opinion on it.
F. Teixeira's Attorney Fee Motion; Civil Code section 1717
1. Background
After the verdict, the subcontractor Teixeira filed a motion to recover its attorney fees from Contractor, as a prevailing cross-defendant. The terms of the subcontract incorporated the prime contract between the Trust and the Contractor, including its attorney fees clause. The subcontract also contained its own attorney fees clause. (Civ. Code, § 1717.)
In the judgment entered on the verdict, the trial court implemented the jury's findings that the subcontractor was not negligent, and it therefore determined that the subcontractor was the prevailing party on the entire cross-complaint, including its express and implied indemnification theories as asserted by the Contractor.
To oppose the subcontractor's fees request, the Contractor claimed that even though its cross-complaint against the subcontractor had been wholly unsuccessful at trial, the indemnity clause in the grading subcontract should be interpreted, at the attorney fees stage of the proceedings, to find that Teixeira had wrongfully failed to provide a defense to the Contractor in this action. When the Contractor was served with the original complaint, it had tendered its defense to Teixeira, but it was refused. Contractor then hired its own lawyers to protect its interests in this litigation. The Contractor thus argued it was entitled to indemnity for its defense costs, and that Teixeira had breached the indemnity agreement by not covering those costs of defense against Plaintiffs' claims. Also, Contractor relied on a paragraph in the subcontract in which the subcontractor agreed to name the Contractor as an additional insured on its liability insurance policy for the Project, to argue that the failure to do so amounted to a breach of the indemnity agreement.
The indemnity clause in the subcontract agreed, generally, for the subcontractor to provide indemnity "to the fullest extent permitted by law," on behalf of the contractor (or the owner, etc.) "from and against claims [or expenses], including but not limited to attorney's fees, arising out of or resulting from performance of the Subcontractor's work under the Subcontract, provided that such claim... or expense is attributable to... injury to... tangible property...." (Italics added.) This indemnification provision continues by providing this exclusionary language: "but only to the extent caused in whole or in part by negligent acts or omissions of the Subcontractor..., regardless of whether or not such claim [or expense] is caused in part by a party indemnified hereunder."
At the hearing on the fees request, the Contractor acknowledged that the jury had not been expressly requested to make a finding on whether the subcontractor had wrongfully failed to provide it with a legal defense to the complaint, pursuant to the indemnity clause. However, the Contractor's attorney believed that it was still an open question for the court to resolve, about whether such a defense should have been provided, and that this issue fell within the scope of the court's equitable discretion in ruling upon the attorney fees requests. (See Hsu, supra, 9 Cal.4th at pp. 876-877.) The Contractor asked the trial court to rule that it was not fair for the Contractor to pay for a defense that should have been provided for it, under the subcontract's indemnity clause, and that this factor should operate against any fees request by the subcontractor.
In opposition, the subcontractor interpreted the indemnity clause differently, to require indemnification only if the subcontractor itself were found negligent, which it was not. Since the parties had agreed not to submit any cross-complaint issues about the alleged breach of the subcontract to the jury, and the jury later found there was no negligence in the work of the subcontractor, the subcontractor argued it clearly qualified as the prevailing party for attorney fees purposes.
In reply, the Contractor argued that it had been necessary to bring in the subcontractor as a cross-defendant, in order to provide for potential insurance coverage for soils problems, so the Contractor had been justified in pursuing the subcontractor throughout the jury trial, in case the jury ultimately found the grading was negligent. In effect, the Contractor was arguing that because the subcontract had included an indemnity provision and a requirement that the Contractor be added as an additional insured to the subcontractor's policy, equity should require an overall finding that the parties should bear their own attorney fees (i.e., through denial of the subcontractor's motion for fees).
In issuing its ruling, the court stated that the Contractor admittedly found itself in "a difficult position," when Teixeira declined to provide a defense. The trial court rejected the Contractor's appeals to its general equitable powers to adjust attorney fees entitlements, and concluded the subcontractor was the prevailing party and was therefore entitled to all its claimed attorney fees, in the amount of $296,148.84. In its written order awarding attorney fees to the subcontractor, the court indicated, "The jury absolved Teixeira of all liability in this action, including contractual liability toward [Contractor]."
2. Analysis
In general, the award of attorney fees under Civil Code section 1717 is reviewed for an abuse of discretion. (Drummond, supra, 149 Cal.App.4th 46, 50-51.) We also inquire whether the statutory criteria for the award were accurately assessed by the trial court. (Carver, supra, 97 Cal.App.4th 132, 142.)
On the cross-complaint, the jury refused to impose any liability on any theory against the subcontractor. The jury found the subcontractor had not breached the standard of care and was not liable to the Contractor on any negligent grading allegations. However, the jury verdict makes no express findings on the Contractor's claims against the subcontractor, with respect to any breach of express indemnity or subcontract allegations. When the trial court implemented the verdict in the judgment, it designated the subcontractor as the prevailing party on the cross-complaint.
The Contractor now argues that, under all the circumstances, it should now obtain reversal of the posttrial attorney fees order on the subcontract, in light of general equitable considerations for determining litigation success in that context, as permitted by Hsu, supra, 9 Cal.4th at page 877 (e.g., respecting substance rather than form). The Contractor mainly argues that the litigation conduct of the subcontractor, in refusing to provide it a defense or any defense costs, should have been taken into account when determining any entitlement to attorney fees and amount of any award, and that conduct should have been assessed as wrongful. (EnPalm, LLC v. Teitler Family Trust (2008) 162 Cal.App.4th 770, 775 (EnPalm).)
The Contractor bases its contentions on its interpretation of Crawford, supra, 44 Cal.4th 541, in which the Supreme Court discussed certain indemnity issues that arise concerning a contractual duty to defend in a noninsurance context. The Contractor argues that Crawford supports its contention that its right to a defense and/or defense costs should not have been contingent upon any establishment, at trial, of the subcontractor's liability for defective work (which did not happen). The Contractor also relies on Hillman v. Leland E. Burns Inc. (1989) 209 Cal.App.3d 860, which interpreted an exclusionary provision in an indemnity clause, and argues there should be no exclusion from the indemnity obligation here. (Id. at pp. 866-868.)
In Crawford, supra, 44 Cal.4th 541, the court relied heavily on Civil Code section 2778 to set forth general rules for the interpretation of indemnity contracts, "unless a contrary intention appears" (id. at p. 553) in such a contract. In particular, the court read Civil Code section 2778, subdivision 4, as placing "in every indemnity contract, unless the agreement provides otherwise, a duty to assume the indemnitee's defense, if tendered, against all claims 'embraced by the indemnity.' " (Crawford, supra, at p. 557.) The Supreme Court further explains, "[t]he indemnitor's failure to assume the duty to defend the indemnitee upon request (§ 2778, subd. 4) may give rise to damages in the form of reimbursement of defense costs the indemnitee was thereby forced to incur. But this duty is nonetheless distinct and separate from the contractual obligation to pay an indemnitee's defense costs, after the fact, as part of any indemnity owed under the agreement. [Citation.]" (Crawford, supra, at pp. 557-558.)
Before addressing the Contractor's theories, we first seek to clarify that there is no indication in the record that the subcontractor was named as anything other than a cross-defendant by the Contractor. The subcontractor was not a named defendant in the complaint, as the subcontractor points out in its cross-respondent's brief. Therefore, the jury was not asked to rule on any liability of the subcontractor to the Plaintiffs (since Plaintiffs never pursued the subcontractor as a defendant). Nevertheless, the parties are disputing on appeal whether the Corporation's negligence allegations in the complaint were being pursued "equally" against the Contractor and also against the subcontractor, "through the cross-complaint." Before trial, the subcontractor had participated in the motions in limine, along with the other named defendants and cross-defendants, and at trial, it was mainly aligned in interest with them against Plaintiffs.
In light of this state of the record, we should treat the respective theories against the various parties in the same manner as were actually presented by the pleadings and the verdict, and not lump them together as the Contractor is attempting to do, in its attempt to claim that, in equity, the subcontractor does not deserve an attorney fee award. We must read the verdict and judgment as expressly distinguishing between the jury's findings on the Plaintiffs' complaint (SAC) and the Contractor's cross-complaint, in our discussions of these closely related issues.
We reject the Contractor's assumption in its cross-appeal that the legal and factual issues regarding an alleged breach of the subcontract and its indemnity clause still remain open for decision, as a matter of law, despite the existence of the jury verdict that found the subcontractor was not liable at all. The trial court was exercising its discretionary powers in the attorney fees context, and it was not required to adopt the Contractor's arguments against the subcontractor's entitlement to an attorney fees award. We do not re-examine the operation of this indemnity clause, nor require the trial court to do so, since no direct appeal was taken by the Contractor from the jury verdict "exonerating" the subcontractor, regarding all the issues actually resolved at trial.
Thus, the full meaning of the Crawford decision, in its potential application to this indemnity provision regarding the nature of any claims "embraced by the indemnity," is essentially beyond the scope of the issues properly presented in this cross-appeal. (Crawford, supra, 44 Cal.4th at p. 557.) Instead, since we must view this verdict and judgment as having fully resolved the underlying issue of any breach by Teixeira of the subcontract, including the indemnity agreement (deciding that it did not), the Contractor's arguments about such a breach of the subcontract are purely theoretical in nature. Even in light of equitable considerations that may otherwise be considered in making attorney fee entitlement decisions, we cannot revisit the substantive issues presented by the cross-complaint, because the subcontractor was found not liable to the Contractor at trial, on the merits. (Hsu, supra, 9 Cal.4th at pp. 876-877.) The guidance given in Crawford for interpreting indemnity obligations should not be applied here to reopen those cross-complaint issues.
The Contractor argues as a backup position that it was an abuse of discretion for the trial court to award all the requested attorney fees to Teixeira, since some of them may have been incurred on tort, rather than contract issues, or on the complaint (SAC), not the cross-complaint. However, at the hearing on this motion, the attorney for the Contractor took the position that the tort and contract issues were intertwined and all the causes of action dealt with the same nucleus of facts, remedies, and claims. As such, he argued apportionment of attorney fees among the different substantive issues was not possible, because of common questions of fact and law. In any case, the Contractor's contentions that it was entitled to a defense, but the subcontractor failed to provide it, do not support its opposition to the attorney fees motion on grounds of proper punishment for any wrongful "litigation conduct." (EnPalm, supra, 162 Cal.App.4th 770, 775.)
Instead, the reporter's transcript of the hearing on the attorney fees request reveals that all the parties were commendably frank and open about the dynamics of the litigation, with respect to insurance coverage, the necessary parties for purposes of protecting the clients' interests, the strategic decisions made to avoid potential legal malpractice liability, and matters of pleading and proof. The trial court was fully engaged in the discussion, and appeared to be well aware of its equitable powers in assessing the attorney fees requests, both as to entitlement and as to amount. (Hsu, supra, 9 Cal.4th at p. 877.) With respect to the specific circumstances between the subcontractor and the Contractor, including the nature of the indemnity clause and the history of the litigation, the trial court made express and implied findings that the subcontractor was the prevailing party as to the Contractor, and that apportionment of fees was not appropriate for any of the reasons being requested. These findings are well supported in the record.
Because of those conclusions, we need not reach the subcontractor's backup argument that we should apply a "no harm, no foul" approach to this portion of the appeal, on the theory that any obligation of the subcontractor to pay defense costs to the Contractor would be recouped or canceled out when the subcontractor obtained an award of prevailing party contractual attorney fees, based on its own interpretation of the subcontract's indemnity agreement. On this record, we find no error or abuse of discretion in the ruling granting attorney fees to the subcontractor in the amount specified.
DISPOSITION
The judgment is affirmed; the posttrial orders are affirmed with the exception that these orders are reversed: (1) granting an award of prevailing party contractual attorney fees to the Corporation; and (2) denying the Contractor's motion for an award of contractual attorney fees against the Corporation; and the trial court is directed to hold appropriate further proceedings to recalculate the contractual attorney fees award due to the Trust, and to calculate the appropriate award due to the Contractor from the Corporation. At these further proceedings, the trial court may allow for any appropriate offsets of ordinary costs alone as between the Contractor and the Corporation on the tort theory of negligence, on which the Corporation was the prevailing party with respect to damages and therefore prevailed with respect to such costs. (Civ. Code, § 1717; § 1032, subd. (a)(4).) Plaintiffs' motion for additional evidence on appeal is denied. (§ 909.) All
parties shall bear their own costs of appeal, and we express no opinion regarding any entitlement to attorney fees on appeal.
WE CONCUR: McDONALD, J., AARON, J.