A recent case in the state of California dealt with a number of issues, including the effect of a liquidated damage clause. In this column, we’ll discuss the issue of whether the plaintiff who recovered the liquidated damage amount was entitled to attorney fees.

In the case at hand, the plaintiffs filed a lawsuit against an alarm company. The District Court granted summary judgment in favor of the defendant alarm company with respect to plaintiffs’ action for gross negligence, but awarded the plaintiffs $1,000 for the liquidated damage amount set forth in the contract. Despite the fact that plaintiffs were awarded judgment for the liquidated damage amount and were the prevailing parties and despite the fact that the contract between the parties contained a provision awarding attorneys’ fees to the prevailing party, the court refused to award attorneys’ fees in favor of the plaintiffs.

The plaintiffs appealed.

The Appellate Court held that the District Court properly granted summary judgment in favor of the alarm company on the gross negligence claim. Although the alarm company failed to properly install the alarm system and failed to provide notification services when it actually received an alarm signal from the defendant, the court held that the alarm company’s legal obligation to provide either service arose solely from its contractual relationship with the plaintiffs and not from any duty independent of the plaintiffs’ contract.

The court further held that the District Court properly limited the plaintiffs’ damages for breach of contract to $1,000, holding that in California, liquidated damages provisions in commercial contracts are presumed valid, “unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.”

The court then pointed out that the plaintiffs did not identify any circumstances that existed at the time of contract formation that would support a conclusion that the liquidated damages provision was unreasonable.

In discussing the attorney fee provision, the court held that the District Court properly denied the plaintiffs’ request for attorneys’ fees because although the plaintiffs were successful in obtaining a breach of contract judgment against the defendant for $1,000, “prevailing party” status for purposes of an attorneys’ fee award under California Civil Code §1717 was measured by “comparing the relief awarded on the contract claim or claims with the parties’ demands on those same claims and their litigation objectives as disclosed by the pleadings . . . and similar sources.”

The plaintiffs succeeded in obtaining only a minute portion of the claimed damages. It was well within the trial court’s discretion to decline the plaintiffs’ prevailing party status in such circumstances.

The court also determined that the alarm company’s request for attorneys’ fees was properly denied. In comparing simple monetary results, the alarm company was ostensibly more successful in achieving its litigation goals than were the plaintiffs. However, a determination of prevailing party status does not solely examine monetary results; rather, it requires evaluation of overall litigation success. To that end, the court found that it was not an abuse of discretion for the District Court to decline the alarm company prevailing party status as well when considering the alarm company actively sought to avoid both the entry of judgment and the entry of $1,000 damages against it on the plaintiffs’ breach of contract claim.

Readers Ask

Q: I have just taken over a small alarm company. A number of the customers are not under contract. What is my exposure?

A: If you have already taken over the accounts, they are your responsibility and unless you have an indemnification from the seller, you are responsible if anything goes wrong. If there is a contract between the company and its subscribers, it should contain the protection provisions afforded to an alarm company, i.e., liquidated damage clause, limitation of liability provision, third party indemnification and a subrogation provision. If there is a loss and the company is not negligent, there should be no exposure other than attorneys’ fees. If there is a question of negligence, you no longer have the protection afforded by the contract and there is a definite exposure.

The next question is whether you have insurance and whether your carrier will cover you if there is no contract. Solution: Ask each customer with no contract to sign one. If they refuse, give them notice and terminate the service.

To ask Les Gold a question, e-mail sdm@bnpmedia.com.