Payment Bonds and Attorneys Fees: Leveling the Playing Field

Among the legal risks that must be analyzed in any litigation is the possibility of having to pay the other side’s attorney fees if one loses at trial. In many states, attorney fees are available to the prevailing party if there is a contract provision for attorney fees or when a statute provides for them. A new California Court of Appeal case expands the general rule in construction cases where there is a performance bond in dispute.

In Mepco Services, Inc. v. Saddleback Valley USD, the prime contractor sued the school district for breach of contract on a school modernization project. Like most contracts for public works, the contract at issue did not have a provision for attorney fees. However, the school district filed a cross-complaint against the contractor for breach of contract and asserted a claim against the contractor’s performance bond.

The contractor prevailed at trial and requested, and was awarded,  attorney fees even though there was no provision for them in the prime contract. The Court of Appeal affirmed, holding that the prime contract required a performance bond, the bond provided that the school district would be entitled to an award of attorneys fees if it filed an action on the bond and, under California Civil Code section 1717, such provisions in contracts ( and now bonds which are incorporated into contracts) are reciprocal so that the prevailing party on the performance bond is entitled to an award of attorney fees.

Observations and Applications

  • This decision could have a chilling affect on public owners filing cross-claims on performance bonds. Under Mepco Service, the public owners now face exposure to having to pay the attorney fees of contractors which removes an advantage public owners generally have when the prime contract does not have an attorneys fee provision.
  • Public owners facing this situation should force the prime contractor to apportion at trial the attorney fees incurred in defending the performance bond claim from those incurred in prosecuting the breach of contract claim. The school district did not raise the apportionment issue at trial and the Court of Appeal ruled the argument was waived on appeal.
  • Given the possibility of having to apportion fees, counsel for prime contractors should keep track of the fees incurred for prosecuting the breach of contract claim vs. defending the performance bond claim. If the owner raises the argument, you will be prepared to introduce the appropriate evidence at trial.
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