Is Demand for Mediation Needed to Recover Attorney Fees Under California’s RPA?

In the recent decision in Evleshin v. Meyer, the California appellate court considered the mediation provision in the standard California Association of Realtors Residential Purchase Agreement.

In August 2019, plaintiffs and respondents Sequoia Evleshin and Nicole Evleshin (collectively, the Evleshins) purchased a Santa Cruz home with wooded acreage (the Property).

The sellers were defendants and appellants Stephen Meyer and Karin Meyer (collectively, the Meyers).

The transaction was governed by a standard form Residential Purchase Agreement (the Agreement) providing that the prevailing party to an action would be entitled to recover its reasonable attorney fees.

The parties also “agree[d] to mediate any dispute or claim arising . . . out of this Agreement, or any resulting transaction, before resorting to arbitration or court action.”

Disputes arose after the sale, and the Evleshins sued the Meyers for breach of contract and fraud.

After a three-day trial, the court announced its decision in favor of the Meyers on the first amended complaint of the Evleshins and on the Meyers’ cross- complaint.

A judgment was filed May 9, 2023, in which the court found that the Meyers were the prevailing parties under the Agreement and were “entitled to recover their attorney fees and costs of suit as permitted by the subject contract, in an amount to be determined in post-trial proceedings.”

The Meyers filed a postjudgment motion for attorney fees and costs.

The trial court denied the motion for attorney fees, and it denied without prejudice the motion for

costs. The court determined that the Meyers were barred from recovery of attorney fees, concluding that “even though the [Meyers] are the ‘prevailing parties’ their refusal to mediate, per the terms of the contract, denies them the recovery of attorney fees.”

In so holding, the court relied upon the following language of the Agreement: “If, for any dispute or claim to which this paragraph applies, any Party[,] . . . before commencement of an action, refuses to mediate after a request has been made, then that Party shall not be entitled to recover attorney fees, even if they would otherwise be available to that Party in any such action.” 

The Meyers challenge the order denying their motion for attorney fees.

First, they contended that the trial court improperly reversed a final judgment on the merits.

The Meyers asserted that the court violated principles of res judicata because the judgment had determined that they were the prevailing parties entitled to attorney fees, and it represented a final decision that the Meyers had not refused to mediate the case.

Second, the Meyers argued that the trial court erred in finding that, under the terms of the contract, their pre-suit refusal to mediate—notwithstanding their later expressed willingness to mediate before commencement of the present action—barred their recovery despite their having prevailed in the action.

The appellate court rejected the Meyers’ first challenge. The trial court’s statement in the judgment that the Meyers were the prevailing parties entitled to an award of attorney fees in postjudgment proceedings was interlocutory in nature and not a final judgment on the attorney fees issue.

It was thus subject to modification by the trial court in postjudgment proceedings.

But the appellate court concluded that the Meyers’ second challenge had merit. In its de novo review of the legal basis for determining an award of attorney fees, it concluded that the trial court erred.

It held that the fact that the Meyers initially refused the Evleshins’ request to mediate the dispute, of itself, did not preclude their recovery of prevailing-party attorney fees under the Agreement.

There is evidence in the record that would support the conclusion that, after the Meyers’ initial refusal to mediate, they (still before the Evleshins filed suit) offered to mediate the dispute.

Based upon its independent determination in construing the contract, the appellate court concluded as follows: If, in fact, the Meyers offered to mediate the dispute before the action was filed by the Evleshins, the Meyers did not forfeit their right to prevailing-party attorney fees due to their initial refusal to mediate.

Accordingly, it reversed the postjudgment order of August 8, 2023, and it remanded the case for further proceedings consistent with this opinion on the Meyers’ motion for attorney fees.

The Evleshins filed the lawsuit against the Meyers and their first amended complaint was filed and was personally served on the Meyers on July 21.

The record was unclear as to the existence of a valid pleading that amended the Evleshins’ first amended complaint. They filed a motion to amend the first amended complaint to “state allegations and particular causes of action which have arisen as a result of defendants’ conduct after the filing of the First Amended Complaint.

The Evleshins alleged four causes of action in the first amended complaint: breach of the Agreement; fraud and deceit; intentional concealment of material facts; and negligent misrepresentation.

They alleged, inter alia, that the Meyers breached the Agreement by (1) failing to disclose all material facts relating to the title, property, and the report; (2) failing to disclose facts related to the septic system; (3) failing to vacate the Property at close of escrow; (4) delivering the Property with rugs in damaged condition; and (5) failing to disclose material facts regarding the harvest of lumber on the Property.

The Agreement contained a provision for recovery of prevailing-party attorney “25. ATTORNEY FEES: In any action, proceeding, or arbitration between Buyer and Seller arising out of this Agreement, the prevailing Buyer or Seller shall be entitled to reasonable attorney fees and costs from the non- prevailing Buyer or Seller, except as provided in paragraph 22A.”

The Agreement also contained a paragraph concerning the mediation of disputes that provided (in pertinent part): “22. . . . [¶] A. . . . The Parties agree to mediate any dispute or claim arising between them out of this Agreement, or any resulting transaction, before resorting to arbitration or court action. . . . If, for any dispute or claim to which this paragraph applies, any Party (i) commences an action without first attempting to resolve the matter through mediation, or (ii) before commencement of an action, refuses to mediate after a request has been made, then that Party shall not be judgment, referred only to the Evleshins’ first amended complaint; the court did not mention any amended pleading.

There was an unreported three-day court trial, and the court, as recited in the minutes of the trial: (1) ruled against the Evleshins on all causes of action of the first amended complaint; (2) made specific findings that the Meyers satisfied all duties of disclosure, they did not conceal any information from the Evleshins regarding logging operations or easements, and the Evleshins did not present any credible evidence of damages; (3) held that judgment should be rendered in favor of the Meyers on all causes of action the Evleshins alleged; (4) held that the Meyers were entitled to judgment of specific performance on their cross-complaint, concluding that they should receive all profits from logging operations on the Property originally scheduled for 2020; (5) found that the Meyers, as defendants and cross-complainants, were the prevailing parties; and (6) found that the Meyers were entitled to attorney fees and costs to be established in post-trial proceedings.

Thereafter, the court entered judgment in favor of the Meyers.

The judgment mirrored the court’s findings reflected in the court minutes, including its finding that the Meyers were the prevailing parties, and, as such, were entitled to recover their attorney fees and costs of suit as permitted by the subject contract, in an amount to be determined in post-trial proceedings.

The Meyers, as prevailing parties, filed a motion for attorney fees and costs, seeking fees of $111,324, and costs of $3,340.69.

They argued that the Evleshins had admitted in the litigation that the Meyers had made a pre-suit request for mediation as required under the Agreement and that the Evleshins had refused that request. 

The Evleshins opposed the motion. They argued that the Meyers were not entitled to fees and costs, inter alia, because: (1) the Meyers resorted to court action by filing a motion to appoint a referee without first mediating their claims (that were later asserted in their cross-complaint), and this failure to mediate precluded their recovery of attorney fees; (2) the Meyers’ defense of the Evleshins’ claims was entirely in tort and not subject to recovery in contract under the Agreement; and (3) the attorney fees claimed were not reasonable.

The posttrial motion was not decided by the judicial officer who had presided over the trial and had signed the judgment. In its tentative ruling, the court concluded that, notwithstanding that the Meyers were the prevailing parties in the litigation, their refusal to mediate, per the terms of the contract, denies them the recovery of attorney fees.

The trial court also concluded in its tentative ruling that the Meyers’ motion for costs should be denied without prejudice, reasoning that, as a procedural matter, the Meyers, in failing to file a memorandum of costs, had not complied with rule 3.1700(a)(1) of the California Rules of Court.

The Meyers asserted in their fee motion that during the lawsuit, in a declaration of Nicole Evleshin in support of the Evleshins’ motion for summary adjudication, the Evleshins admitted that the Meyers requested to mediate the claims in this dispute on July 10, 2021, but the Evleshins rejected the request because they were suspicious of the odd nature of the letter.

A formal order was filed denying the motion for attorney fees and denying without prejudice the motion for costs.

The Meyers filed a notice of appeal from the order denying their motion for attorney fees and costs.

The Meyers challenged the postjudgment order denying attorney fees on the basis that the judicial officer who rendered the decision reversed a final judgment on the merits previously made by another judicial officer.

The Meyers contended that the finding in the postjudgment order that they had refused mediation and were thus barred from recovering attorney fees was precluded under principles of res judicata because (1) there had been a final judgment on the merits, and (2) the issue decided in the judgment (i.e., the Meyers’ alleged refusal to mediate) was identical to the one presented in the subsequent fee motion.

The appellate court found the Meyers’ position was without merit.

Under the circumstances presented, the law is clear that there was no final judgment that mandated a subsequent postjudgment determination that the Meyers were entitled to an award of attorney fees. The trial judge ruled that the Meyers were the prevailing parties and, as such, were entitled to attorney fees and costs under the Agreement in an amount to be determined in post-trial proceedings.

While this language in the judgment appears to be definitive and final except for reserving for a future hearing a determination of the amount awardable, the judgment was, in fact interlocutory on this issue of the Meyers’ claim for fees and costs.

The Meyers, in asserting that the trial court erred in denying their motion, challenged the court’s rationale: namely, that because they had initially refused to mediate the dispute, they were barred under the Agreement from recovering prevailing-party attorney fees.

The Meyers argued that, although they had initially rejected the Evleshins’ prelitigation request for mediation, the Meyers later (and, importantly, before litigation commenced) advised the Evleshins of their willingness to mediate. Under these circumstances, the Meyers contended, the court erred in concluding that their initial refusal to mediate caused their irrevocable forfeiture of the right to prevailing-party attorney fees.

The Evleshins responded that the trial court did not err in denying the motion for attorney fees.

They asserted that the court properly found, based on the evidence presented, that the Meyers had flatly rejected the Evleshins’ request to mediate their dispute. Pursuant to paragraph 22.A of the Agreement the Meyers were therefore not entitled to recover their fees, despite being the prevailing parties in the action.

The undisputed facts presented below were that: (1) before the Evleshins filed their lawsuit, they requested that the Meyers mediate their claims under the Agreement; (2) the Meyers rejected that request; (3) approximately six weeks later—and also before the Evleshins filed the action, the Meyers advised that circumstances (relating to timber operations) had changed, the urgency for proceeding was reduced, and there was time for both the mediation the Evleeshins stated that they wished to pursue and/or the arbitration; (4) two days later, the Evleshins filed suit (serving it on the Meyers one week later); and (5) two days after bringing suit, the Evleshins rejected the Meyers’ request to mediate the Evleshins’ claims.

The trial court, in its recital of the relevant facts in the tentative decision, noted the Evleshins first requested mediation in May 2021, prior to instituting this instant action, which was refused by the Meyers. (Though the door to mediation was re-opened in July 2021 by the Meyers.)

The court also indicated in its recitation of facts that on July 14, 2021, Sequoia Evleshin responded to the July 10 communication of the Meyers’ counsel, who had indicated that circumstances had changed and there was time for mediation; Mr. Evleshin stated that his wife and he were no longer interested in mediating their claims against the Meyers.

It was clear from the foregoing that the issue that must be resolved here is the meaning of the language in the Agreement (paragraph 22A, fourth sentence) that forecloses the right to prevailing-party attorney fees (granted under paragraph 25) for “. . . any Party [who] (i) commences an action without first attempting to resolve the matter through mediation, or (ii) before commencement of an action, refuses to mediate [a dispute arising out of the Agreement] after a request has been made. . . .” (Italics added.)

The appellate court construed this language in light of the first sentence of paragraph 22A, which provides the parties agree to mediate any dispute or claim arising between them out of this Agreement, or any resulting transaction, before resorting to court action.

The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful. Such intent is to be inferred, if possible, solely from the written provisions of the contract.

When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone, if possible; subject, however, to the other provisions of this Title. If contractual language is clear and explicit, it governs.

But even if one provision of a contract is clear and explicit, it does not follow that that portion alone must govern its interpretation; the whole of the contract must be taken together so as to give effect to every part. An interpretation which renders part of the instrument to be surplusage should be avoided.

In interpreting a contract, the threshold question is whether the contract is ambiguous—that is, reasonably susceptible to more than one interpretation.

A contract that may be subject to two different interpretations should be construed in a manner that will make the instrument lawful, operative, definite, reasonable and capable of being carried into effect and avoid an interpretation which will make the instrument extraordinary, harsh, unjust, inequitable or which would result in absurdity.

In this case, there was no extrinsic evidence presented below concerning the parties’ intentions with respect to paragraph 22A.

The initial question was: Is the language of paragraph 22A—specifically the fee disentitlement provision in the fourth sentence (clause (ii)) based upon the refusal of the other party’s mediation request—ambiguous, i.e., is “reasonably susceptible to more than one interpretation[?]”

One interpretation is that if, before an action is commenced, a party (Party A) refuses a request to mediate made by the other party (Party B), then Party A is barred from recovery of prevailing-party attorney fees, regardless of whether he or she reverses that position regarding mediation before the action is commenced. The Meyers could not recover attorney fees under this interpretation.

Another construction (second interpretation) of the fee disentitlement provision—apparently advanced by the Meyers here—is that if Party A refuses Party B’s pre-suit mediation request, Party A may still recover prevailing-party attorney fees if Party A subsequently expresses a willingness to mediate prior to any court action being filed.

Under this second interpretation, the disentitlement provision in the fourth sentence (clause (ii)) of paragraph 22A would not be triggered if the party initially refusing to mediate (Party A) retracts that refusal before the action is filed.

Is the Agreement reasonably susceptible to the second interpretation? In answering this question, the appellate court considered the language of both the first and fourth sentences of paragraph 22A.

In addressing the fourth sentence, in reading the two clauses together, it observed that the focal point of disentitlement is the status of mediation efforts immediately prior to the filing of an action. In clause (i), the party who commences an action must, at some moment up to its filing, have attempted to resolve the dispute through mediation to avoid application of the fee disentitlement provision.

Similarly, in clause (ii), the party who later prevails must, at some moment prior to an action being filed, have responded favorably to the other party’s mediation request to avoid application of the fee disentitlement provision.

Considering these two clauses together, it would be incongruous if fee disentitlement were applied (in clause (ii)) against the party who has agreed to mediation shortly before an action is filed but not applied (in clause (i)) against the party who controls the litigation who, shortly before filing it, attempts to mediate the dispute.

The first sentence of paragraph 22A, like the fourth sentence, indicates that the end point by which a party must make efforts to mediate the dispute is when an action is filed.

The first sentence of paragraph 22A requires that the parties mediate any disputes “before resorting to . . . court action.” (Italics added.) Thus, the first sentence imposes a pre-suit duty to mediate, while the fourth sentence imposes a contractual penalty—a disentitlement to prevailing-party attorney fees—for failing to satisfy that duty.

Reading the two sentences together, the disentitlement penalty (fourth sentence) applies only when the party who ultimately prevails violates the duty to mediate (first sentence) by either filing an action without first attempting to mediate the dispute (fourth sentence, clause (i)), or by refusing the other party’s request to mediate and not retracting that refusal before an action is filed (fourth sentence, clause (ii)).

Further because the duty to mediate imposed under the first sentence of paragraph 22A applies uniformly to all parties, it would be seemingly inappropriate to interpret the disentitlement provision as giving a less stringent application to the party commencing the court action than to the other party to whom a mediation request is made.

Therefore, the appellate court concluded that this second interpretation is reasonable, and the fee disentitlement provision is ambiguous.

A contract capable of more than one reasonable interpretation is ambiguous and the court must determine the ultimate construction to be placed on the ambiguous language by applying the standard rules of interpretation.

Having resolved the threshold question of whether the contract is ambiguous, the appellate court next determined which of the two interpretations of the disentitlement provision of the Agreement will make the instrument lawful, operative, definite, reasonable and capable of being carried into effect and will avoid making the instrument extraordinary, harsh, unjust, inequitable or which would result in absurdity.

Considering these two reasonable interpretations, under the first interpretation, the party refusing a pre-suit mediation request is thereafter barred from recovering prevailing-party attorney fees regardless of the circumstances following the refusal.

Taken to its extreme, if the party refused the request and the next day (perhaps as a result of seeking advice of newly retained counsel), reversed his or her position (before the requesting party filed an action), he or she would be precluded from recovering attorney fees.

Such a construction would not serve the public policy of promoting mediation as a preferable alternative to judicial proceeding where mediation may result in a dispute being resolved in a much less expensive and time-consuming manner.

Rather, such an interpretation would potentially discourage mediation; if the party, through his or her initial refusal, has forfeited the right to prevailing-party attorney fees, there is less incentive to reverse that position before an action is filed.

The first interpretation ignores the practical realities of dispute resolution and litigation. It is undeniable that emotions of parties embroiled in a dispute can sometimes run high, irrespective of whether the dispute has culminated in litigation. This can result in an evolution of positions taken by the parties.

Applying the first interpretation to a party’s initial refusal of a pre-suit mediation request ignores the realistic and practical possibility that the refusing party may, upon reflection, change his or her mind about mediation before an action is filed

By way of contrast, applying the second interpretation to the fee disentitlement provision yields a more flexible approach, does not run the risk of discouraging mediation, and accommodates the practical realities of dispute resolution and litigation. In short, application of the second interpretation makes the instrument reasonable and avoids making the instrument harsh, unjust, or inequitable.

A provision or condition that results in the forfeiture of a contractual right is not favored in the law.

As the California Supreme Court has explained, there is a settled policy of the law not to enforce a forfeiture in the absence of a clear statement to that effect. Forfeitures are not favored by the courts, and if an agreement can be reasonably interpreted so as to avoid a forfeiture, it is the duty of the court to avoid it. The burden is upon the party claiming a forfeiture to show that such was the unmistakable intention of the instrument. A condition involving a forfeiture must be strictly interpreted against the party for whose benefit it is created.

Applying the second interpretation, a party refusing a pre-suit request to mediate would be barred from recovering prevailing-party attorney fees only if he or she did not retract that refusal by agreeing to mediate before the action is filed.

Therefore, given that forfeitures are not favored by the courts and that it is the court’s duty to reasonably interpret the Agreement so as to avoid a forfeiture, the appellate court found that the second interpretation which will avoid a forfeiture is the one that can and must be selected in that case.

LESSONS:

1.         For disputes regarding the CAR Residential Purchase Agreement, always request mediation before filing a lawsuit, except for the limited exceptions, in order to preserve the right to recover attorney fees as the prevailing party.

2.         For disputes regarding the CAR Residential Purchase Agreement, always accept and do not refuse mediation in order to preserve the right to recover attorney fees as the prevailing party.

3.         A contract that may be subject to two different interpretations should be construed in a manner that will make the instrument lawful, operative, definite, reasonable and capable of being carried into effect and avoid an interpretation which will make the instrument extraordinary, harsh, unjust, inequitable or which would result in absurdity.

4.         Because the duty to mediate imposed under the first sentence of paragraph 22A applies uniformly to all parties, it would be seemingly inappropriate to interpret the disentitlement provision as giving a less stringent application to the party commencing the court action than to the other party to whom a mediation request is made.

5.        Therefore, the appellate court concluded that this second interpretation is reasonable, and the fee disentitlement provision is ambiguous.