California-American Water v. Marina Coast Water District, DCA1/1, 12/16/17
Government Code 1090 forbids government employees from being financially interested in contracts made by them in their official capacities. When that happens, the contract is unenforceable.
Here, the parties (including two public water agencies) entered a contract to collaborate on a water desalination project. A member of Monterey’s board of directors had a financial stake in the outcome of the contract. Of the three parties to the contract, the private company, California American, and Monterey agreed that the contract was void. Marina disagreed, filed a cross-complaint and fought the case for years.
Ultimately the trial court held that the contracts were void because section 1090 had been violated. It nonetheless awarded attorney’s fees to California-American and Monterey because they prevailed and the contract Marina tried to enforce had an attorney’s fees clause.
Held: Affirmed.
The only interesting question here is how attorney’s fees be granted based on an attorney’s fees clause that is contained in a contract that is unenforceable?
First, section 1717, subdivision (a) declares that in “any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.”
Second, per California’s Supreme Court, Section 1717 ensures mutuality, including where “a person sued on a contract containing a provision for attorney fees to the prevailing party defends the litigation ‘by successfully arguing the inapplicability, invalidity, unenforceability, or nonexistence of the same contract.’ ” Santisas v. Goodin. Under this doctrine, “if the party would have been exposed to fees had the court found against it, then that party is entitled to fees for prevailing.”
Under these principles, Marina was stuck.
This principle does not apply, and attorney’s fees won’t be awarded, where the contract isn’t just unenforceable, but where the contract itself is illegal. While Marina forgot to make that argument to the trial court, the appellate court exercised its discretion to consider and then reject it. The court reasoned that the contracts and it objects where otherwise perfectly lawful; the fact that they were rendered unenforceable due to a conflict of interest did not make them “illegal.”