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By: Nancy Zabala Graham

The California Court of Appeal in the third appellate district recently affirmed the award of almost $200,000 in attorney fees pursuant to a “prevailing party” attorneys’ fees provision in a contract. What makes this case interesting is the fact that the property owner, who was awarded his attorneys’ fees, was not in contract with the subcontractor who was ordered to pay the fees. The Court based its award on a contract between the general contractor and subcontractor and found that the owner was an intended third party beneficiary to that contract. Vincent Loduca, Jr. v. George Polyzos (2007) 153 Cal. App. 4th 334.

In 1989, Vincent Loduca, the project owner, retained MCM Builders to act as the general contractor to build his custom home. MCM, in turn, hired subcontractor QMC to manufacture and install custom cabinetry in the new home. The subcontract between MCM and QMC included a clause which stated that the prevailing party in any litigation arising out of the subcontract would be awarded its attorneys’ fees.

Although QMC was directly in contract with MCM, Loduca paid for some of the subcontractor’s services directly. In addition, toward the end of the project, Loduca and QMC entered into a separate agreement, where QMC agreed to deliver certain remaining components and Loduca agreed to pay $10,000 on delivery. When Loduca received the cabinets he noticed numerous problems with them and asked his bank to stop payment on the check sent to QMC. QMC then removed all of the cabinetry from the home without the owner’s permission and litigation ensued. QMC filed a complaint against Loduca for recovery of unpaid amounts and Loduca filed a cross complaint for breach of contract, among other things.

The trial court entered judgment in favor of Loduca and awarded $65,000 in damages. At a subsequent hearing, the trial court awarded attorneys’ fees to Loduca pursuant to the contract between MCM and QMC in the amount of $190,350. QMC appealed, claiming the court erred by awarding Loduca attorneys’ fees because Loduca was not a party to the contract between QMC and MCM and therefore should not benefit from the attorneys’ fees clause.

The court held that the homeowner was in fact “an intended third party beneficiary” who could enforce the subcontract and request attorneys’ fees. A third party beneficiary, although not a party to the contract, may be entitled to enforce a contract if it proves that the contracting parties intended to benefit the third party with the contract.

In Loduca’s case, the court concluded that Loduca was an intended beneficiary of the subcontract and therefore able to enforce the attorneys’ fees provision for several reasons. First, the subcontract’s “reference” line identified Loduca as the owner. Second, the subcontract stated the cabinetry was to be built according to plans developed for Loduca’s home. Third, the contract contained a broad attorneys’ fees clause which did not specify who could collect the attorneys’ fees if they prevailed. The court thus applied this broad provision to extend to any court action that arose out of the contract even if was brought by a third party.

QMC argued the separate agreement between Loduca and QMC demonstrated the parties did not intend for Loduca to be able to recover attorneys’ fees because this agreement did not contain an attorneys’ fees provision. However, the court disagreed and held the QMC-Loduca agreement did not state that it superseded the MCM-QMC agreement but it simply changed the terms of payment and imposed additional penalties.

In addition, the court based its decision on the close relationship between the subcontractor and the property owner. Loduca made a separate agreement and paid QMC directly. The court held that the alteration by the QMC-Loduca agreement to the original contract effectively made Loduca a party to the contract, thereby entitling and burdening him with the attorneys’ fees provision. The court concluded that in these circumstances, where such a close relationship exists between the contracting parties and the third party beneficiary, the contracting parties intended for the owner to have a right of enforcement of the prevailing party attorneys’ fees clause.

A few lessons may be learned from this case. First, all construction participants should be acutely aware of any prevailing party attorneys’ fees clauses in their contracts. These provisions can vastly increase a party’s exposure and most insurance policies do not cover their contractually agreed upon transfer of risk. In order to avoid potential liability to a third party, contracts should specify the parties who can enforce the prevailing party clause. Good drafting techniques can assist in avoiding this type of third party liability. Further, all construction participants should always be aware of the established contractual relationships and their associated chains of communication. Deviating from the norms could unknowingly subject you to the terms, and obligations of a contract between others.

About the Author: Nancy Zabala Graham is a law clerk Gordon & Rees, LLP; 275 Battery Street, Suite 2000; San Francisco, CA 94111; Phone: (415) 986-5900.  Website:  http://www.gordonrees.com.

The Construction Practice Group at Gordon & Rees represents design professionals, developers, contractors, subcontractors and suppliers. Projects with which the group has had experience includes site developments, residential developments, commercial buildings, hospitals, jails, airports, bridges, dams and power plants. The group has experience with all aspects of construction-related litigation, including design or construction defects; delay, disruption and acceleration; earth movement; job-site injury and many others.

This article is published  in ConstructionRisk.com Report, Vol. 9, No. 8.