Weekly Law Resume - June 14, 2012: Real Estate Sales Contracts – Mediation Provision as a Bar To Recovery of Attorneys’ Fees

by Low, Ball & Lynch
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Joe Cullen, et al. v. Paul Corwin, et al.
Court of Appeal, Third District (June 7, 2012)

More and more, real estate form purchase agreements have provisions which condition a prevailing party’s right to attorneys’ fees to a requirement that they mediate (or if they are the defendant, that they not refuse a mediation request). This case considered whether a defendant seller could recover attorneys’ fees after refusing a mediation request first made after the lawsuit was filed.

Plaintiffs Joe and Marieanne Cullen purchased a vacation home from defendants Paul and Geraldine Corwin in 2002. There were some cracks in the decking on the garage roof, and a home inspector noted unspecified water damage in the ceiling. The purchase agreement was a standard real estate form, which provided that the prevailing party in any dispute was entitled to recover legal fees. However, this right was subject to a condition precedent that read “If, for any dispute…to which this paragraph applies, any party commences an action without first attempting to resolve the matter through mediation, or refuses to mediate after [the making of] a request…, then that party shall not be entitled” to recover attorney’s fees.

In March of 2005 the Cullens noted water pooling on the roof, which leaked “a lot.” They retained an attorney and later obtained an expert report regarding the cause of the roof leaks, and completed repairs in 2007. In September of 2009, they filed suit against the Corwins, alleging that they acted either negligently or fraudulently in failing to disclose the defective condition of the garage roof at the time of sale. Although neither side apparently discussed mediation prior to the filing of the suit by the Cullens, the Cullens’ attorney requested twice in 2010 that the Corwins participate in mediation, which the Corwins refused. Their attorney subsequently indicated that this was because they were seeking to conduct discovery to allow them to bring a summary judgment motion, and that it would be a “waste of time” to mediate before the motion, but that they planned to mediate if the motion was unsuccessful.

The Corwins moved for summary judgment based on the statute of limitations. That motion was granted, and judgment was entered in their favor. Subsequently, the Corwins’ motion for attorneys’ fees pursuant to the provision in the purchase agreement was granted, and they were awarded $16,500 in fees. The Cullens appealed the granting of attorneys’ fees based on the condition precedent that a party participate in or not refuse a request for mediation.

The Court of Appeal reversed, holding that the Corwins were not entitled to recover attorneys’ fees. The Court was not persuaded by the Corwins’ argument that because the Cullens filed suit before they demanded mediation, the Corwins did not have to agree to mediate when the request was made after suit was filed. The Court said the language in the provision was clear that fees could not be sought by (1) “one who commences an action without first attempting mediation or (2) one who refuses to mediate after [the making of] a request.” Nothing in the second portion of that requirement indicated that a mediation request could be refused on the basis that it was first made after the action commenced. Hence, by refusing to mediate when plaintiffs made their requests, the Corwins waived their right to recover attorneys’ fees if they prevailed.

The Corwins also argued that they were entitled to obtain their discovery responses and bring their motion for summary judgment prior to mediation, so that it would be a “meaningful” mediation if it took place once the parties knew where they stood in terms of the summary judgment. The Court noted that as a defensive strategy there was nothing wrong with the Corwins’ denial of a mediation request, but that this did not excuse the contractual language that they assent to mediation in order to be able to recover their attorneys’ fees. According to the Court, the language in the mediation provision “is designed to encourage mediation at the earliest possible time.” In addition, there is a strong public policy in promoting mediation “as a favorable alternative to judicial proceedings.”

In light of the language of the provision, as well as the Corwins’ lack of assent to the requests for mediation, the Court held that they were not entitled to seek attorneys’ fees despite being the prevailing party on the motion for summary judgment. As such, the Court reversed the order awarding fees to the Corwins.

COMMENT

In standard sales contracts where the prevailing party attorneys’ fees provision is tied to mediation, unless the party suing seeks mediation before suing, they will not be able to collect their attorneys’ fees if they win. Conversely, a defendant being sued under such a contract will not be able to collect fees if a request for mediation is made, either before or after litigation is filed, and refused by the defendant. It makes sense to agree to mediation if requested by the other side, at the very least to protect the right to attorneys’ fees.

For a copy of the complete decision see: http://www.courts.ca.gov/opinions/documents/C067861.PDF

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