One short sentence buried near the end of a contract often decides whether a dispute is worth fighting at all: the attorney's fees clause. In California, whoever drafts that clause — or forgets to — has shaped the economics of every future disagreement under the contract. Here is how these clauses work, what Civil Code § 1717 does to them, and the drafting decisions that matter.
The default rule: everyone pays their own lawyer
California follows the American rule, codified in Code of Civil Procedure § 1021: each side bears its own attorney's fees unless a statute or a contract says otherwise. That default has real consequences. A business owed $60,000 on a contract with no fees clause may spend a large share of that amount on litigation and cannot recover those fees even after prevailing — court costs, yes; attorney's fees, no. For smaller claims, the math can make enforcement impractical. A fees clause changes that calculus: the party in the right can pursue the claim knowing that fees may shift to the other side, and the party in the wrong knows it may pay for both sets of lawyers.
Section 1717: one-way clauses become two-way
Sophisticated parties sometimes draft clauses awarding fees only to themselves — the landlord recovers fees, the tenant never does. California neutralizes that tactic. Civil Code § 1717 makes any contractual fees provision reciprocal in an action on the contract: if the contract entitles one party to fees, the prevailing party recovers them, whoever that turns out to be. The statute cannot be waived by contract language, and it applies even when a party defeats the contract claim by proving the contract is unenforceable. It may also apply when a nonsignatory defendant defeats a contract claim if that defendant would have been entitled to fees had the plaintiff prevailed. The practical lesson: never assume a one-sided clause protects only you. If you put a fees provision in your form, you have given your counterparty the same weapon.
Who is the "prevailing party"?
Under § 1717(b), the prevailing party is the one who obtains the greater relief on the contract, and the trial court has discretion to find that neither side prevailed — for example, after genuinely mixed results. Two wrinkles matter in practice:
- Voluntary dismissal. If the plaintiff voluntarily dismisses the contract action, § 1717(b)(2) provides there is no prevailing party on the contract claim, so neither side recovers fees under the statute;
- Settlement. Most settlements resolve fees as part of the deal. If your settlement agreement is silent on fees, you may have left a live issue behind — a well-drafted release addresses fees explicitly.
Drafting decisions that change outcomes
Because § 1717 governs actions "on a contract," the wording of the clause controls how far it reaches. Key choices for a business contracts attorney to walk through with you:
- Scope. A narrow clause ("in any action to enforce this Agreement") may not cover related tort claims like fraud. Broad language ("any dispute arising out of or relating to this Agreement") can extend fee recovery to non-contract claims between the parties — reciprocity under § 1717 applies to the contract claims, while broad wording governs the rest;
- Caps and carve-outs. Parties can cap recoverable fees or exclude certain proceedings, which limits downside for both sides;
- Reasonableness. Courts award reasonable fees, typically using the lodestar method (reasonable hours times reasonable rates) — not whatever a party actually spent;
- Arbitration and collection. Say expressly whether fees are recoverable in arbitration and in post-judgment enforcement efforts, since collecting a judgment can itself be expensive;
- Fees on fees. The work of proving up a fee award is generally compensable too, but clean drafting avoids fights about it.
Should your contracts include one?
It depends on which side of disputes you expect to be on. If you extend credit, license software, or perform services and then chase payment, a fees clause is usually your friend — it gives a collection demand real weight because the debtor faces paying your fees on top of the debt. If you are more likely to be the defendant — a customer signing a vendor's form, a company facing claims from many counterparties — a fees clause raises your exposure, and thanks to § 1717 you cannot make it one-directional. There is no universally right answer; there is only the answer that fits your risk profile, which is a conversation worth having before the form goes out, not after the dispute arrives.
Talk to a California business attorney
An attorney's fees clause is leverage you set years before you need it. Itkin Law drafts and reviews California contracts with the endgame in mind. Schedule a free consultation or call (949) 418-2113.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. Facts matter; consult a lawyer about your specific situation.
