The first question a business owner asks me about a contract dispute is usually not about liability. It is about fees. Can I make the other side pay my lawyer? The answer depends almost entirely on one paragraph in the contract and one statute that rewrites that paragraph whether the parties like it or not. The statute is Civil Code section 1717, and it decides who pays in a large share of the business cases filed in California.

Most owners assume a fee clause works the way it reads. It does not. A clause that names only one party protects both. A clause that covers only collection actions can end up covering the whole contract. A clause that promises fees to the winner pays nothing if the case settles or is dismissed, unless the settlement says otherwise. And a party that wins a procedural skirmish but not the dispute itself usually walks away with its own bill. This guide covers the rule, the cases that show how courts apply it, and the drafting choices that decide whether the clause is worth anything.

In short:

• California follows the American rule: each side pays its own lawyer unless a statute or contract shifts fees. (Code Civ. Proc., § 1021.)
• Civil Code section 1717 makes every contractual fee clause reciprocal. The party that prevails on the contract gets reasonable fees, whether or not the clause named it.
• The prevailing party is the one who recovered greater relief on the contract claims. A clean win is a win as a matter of law. Mixed results give the judge discretion to award nothing.
• If the case is voluntarily dismissed or dismissed under a settlement, there is no prevailing party on the contract, and no contract fees.
• The fee motion is due within the time to appeal, usually 60 days after notice of entry of judgment. Missing it forfeits the fees.

California's default rule is that each side pays its own lawyer

Code of Civil Procedure section 1021 leaves the "measure and mode of compensation of attorneys" to the agreement of the parties, except where a statute says otherwise. (Code Civ. Proc., § 1021.) That is the American rule. A business that wins a breach of contract case on a contract with no fee clause recovers its damages and its court costs. It does not recover what it paid its lawyers, and in a contested commercial case that figure often rivals the damages.

Fees become recoverable as costs only when a contract, a statute, or some other rule of law authorizes them. (Code Civ. Proc., § 1033.5, subd. (a)(10).) For most business disputes, the contract is the only source. That is why the fee clause deserves more attention at signing than it usually gets.

What section 1717 does to the clause you signed

Civil Code section 1717 applies to any action on a contract where the contract provides that fees shall be awarded either to one of the parties or to the prevailing party. In that situation, the party prevailing on the contract, "whether he or she is the party specified in the contract or not," is entitled to reasonable attorney's fees in addition to other costs. (Civ. Code, § 1717, subd. (a).)

Three consequences follow, and each one surprises clients.

The clause is mutual no matter how it is written. A vendor agreement that says the vendor may recover fees in any collection action also lets the customer recover fees if the customer wins. The Legislature wrote the statute to end one-sided fee clauses, and courts apply it that way. (Santisas v. Goodin (1998) 17 Cal.4th 599, 611.)

The clause covers the whole contract unless both sides had lawyers. The statute says a fee provision "shall be construed as applying to the entire contract," unless each party was represented by counsel in negotiating and signing it and the contract says so. (Civ. Code, § 1717, subd. (a).) A clause limited to collection, or to a single indemnity paragraph, expands to every claim on the contract unless the agreement recites that both sides were represented. Most form contracts do not.

The clause cannot be waived. Fees under section 1717 "shall not be subject to waiver by the parties," and a waiver provision is void. (Civ. Code, § 1717, subd. (a).) A party cannot sign away the reciprocal right at the outset.

The reciprocity rule has one more edge. A defendant who wins by proving the contract was never formed, is unenforceable, or does not apply to it still recovers fees, so long as the plaintiff could have recovered fees had the plaintiff won. (Santisas, supra, 17 Cal.4th at p. 611.) In American Building Innovation LP v. Balfour Beatty Construction, LLC (2024) 104 Cal.App.5th 954, an unlicensed subcontractor sued on its subcontract. The general contractor defeated the claims under the licensing statute, which bars an unlicensed contractor from suing for compensation. The Court of Appeal affirmed a fee award to the defendants of more than $1.55 million under the subcontract's fee clause. The subcontractor had sued to enforce the contract, so the clause applied against it.

Who is the "prevailing party"

The statute defines the prevailing party as the party "who recovered a greater relief in the action on the contract," and it lets the court find that no party prevailed at all. (Civ. Code, § 1717, subd. (b)(1).) The California Supreme Court filled in the details in Hsu v. Abbara (1995) 9 Cal.4th 863. The trial court compares the relief awarded on the contract claims with the parties' demands and their litigation objectives, as shown by the pleadings, trial briefs, and opening statements. (Id. at p. 876.) When one side gets a "simple, unqualified win," the court has no discretion to deny fees. A defendant who defeats the only contract claim, or a plaintiff who gets everything it asked for, prevails as a matter of law. (Id. at pp. 876-877.)

Mixed results are where the discretion lives. If both sides win something, the judge may pick a prevailing party or find there is none. But the discretion is not unlimited. In de la Cuesta v. Benham (2011) 193 Cal.App.4th 1287, 1295, a landlord sued for about $103,000 in back rent and recovered about $70,000. The tenant, who claimed she owed nothing, recovered nothing. The trial court found no prevailing party. The Court of Appeal reversed. A result that lopsided has a winner, and refusing to say so was an abuse of discretion.

Procedural wins do not count unless they end the dispute. In DisputeSuite.com, LLC v. Scoreinc.com (2017) 2 Cal.5th 968, a defendant got the California case dismissed under a forum selection clause, and the plaintiff refiled in Florida. The Supreme Court held the defendant was not the prevailing party. Fees go "to the party who prevailed on the contract overall, not to a party who prevailed only at an interim procedural step." (Id. at p. 977.) The contract claims were still alive in another courtroom, so there was nothing to compare yet. (Id. at p. 973.)

The same logic decided a case this year. In O'Leary v. Jones (Cal. Ct. App., Mar. 24, 2026, No. D085327), a lease guarantor got a petition to confirm an arbitration award against him dismissed for lack of personal jurisdiction. He then asked for fees under the guaranty. The trial court found no prevailing party because it had never ruled on whether the award bound him, and the Court of Appeal agreed. He recovered his ordinary court costs, which have a different and more generous definition of prevailing party, but not his attorney's fees.

The dismissal and settlement trap

This is the rule that costs clients the most money, and it is written in plain language. "Where an action has been voluntarily dismissed or dismissed pursuant to a settlement of the case, there shall be no prevailing party for purposes of this section." (Civ. Code, § 1717, subd. (b)(2).)

Two situations follow from it.

A plaintiff that sues on a contract and then dismisses, for any reason, owes the defendant nothing in contract fees. The Supreme Court confirmed in Santisas v. Goodin that the statute overrides a fee clause on this point, even a clause that says fees go to the prevailing party in any action. (17 Cal.4th at p. 617.) The Court of Appeal applied the rule in 2024 to a landlord who dismissed an unlawful detainer case after rejecting the tenant's statutory settlement offer. The tenant recovered costs, including expert fees, but no attorney's fees. (Riverside Mining Ltd. v. Quality Aggregates (2024) 104 Cal.App.5th 269.)

A settlement that ends in a dismissal leaves fees where they fell unless the agreement says who pays them. I see settlement agreements every month that resolve a six-figure claim and never mention the fees either side spent getting there. If the deal is that the defendant pays a sum and the plaintiff dismisses, the plaintiff's fee clause is dead the moment the dismissal is entered. Any fee recovery has to be built into the settlement number or stated as a separate term. Our guide to enforcing settlement agreements under section 664.6 covers what else the agreement needs.

The clause only reaches what it says: contract claims versus torts

Section 1717 governs actions "on a contract." A fraud claim, a conversion claim, or an interference claim is not on a contract, so the statute does not make the fee clause mutual for those claims. Whether the clause reaches them is a question of what the clause says. (Santisas, supra, 17 Cal.4th at p. 608.) A clause limited to fees "incurred to enforce this agreement" probably stops at the contract claims. A clause covering "any dispute arising out of or relating to this agreement" generally reaches the torts as well. In Santisas, the clause covered any litigation "arising out of the execution of this agreement or the sale," and the sellers recovered fees for defending the tort claims even after the plaintiffs voluntarily dismissed. The statute barred fees on the contract claim. It did not bar them on the torts.

For a business owner, the drafting lesson runs in both directions. A broad clause means you can recover fees when a counterparty sues you for fraud alongside breach of contract and loses. It also means you pay the other side's fees when you lose those claims. Decide which risk you would rather carry before you sign.

One category of claim sits outside the clause entirely. Some statutes give fees to one side only, such as a consumer who wins under the lemon law or the Consumers Legal Remedies Act. A business that defeats those claims cannot use its sales contract to collect fees from the consumer. The specific one-way statute controls over the general reciprocity rule. (Martinez v. SAI Long Beach B, Inc. (2025) 108 Cal.App.5th 367.) Businesses that sell to consumers should not count on the fee clause in their form contracts.

People who never signed the contract

A fee clause can bind, and benefit, a party that never signed. The test is whether the nonsignatory stands in the shoes of a party to the contract. If it would have been liable for the other side's fees had it lost, it may recover fees when it wins. The Supreme Court set the rule in Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 128-129, where a creditor sued two individuals as the alter egos of a corporation that signed promissory notes with a fee clause. The individuals won, and they recovered fees under the notes. Had the creditor proved alter ego, they would have owed fees. The right ran both ways.

That is a point worth remembering before adding individual owners to a complaint on an alter ego theory. If the theory fails, the fee clause in the underlying contract can turn a losing claim into a fee judgment against the plaintiff. The test cuts the other way as well. In September 2026 the Court of Appeal refused to charge fees to a nonsignatory spouse whose claims were not based on the contract, because she could not have recovered fees herself had she won. (Sujan v. UHS Corona, Inc. (Cal. Ct. App., Sept. 16, 2026, No. E084185).)

How much: the lodestar, in-house counsel, and the lawyer who represents himself

Section 1717 awards "reasonable" fees fixed by the court, not whatever the winner paid. The calculation starts with the lodestar: the hours reasonably spent multiplied by a reasonable hourly rate for the community, adjusted for the circumstances of the case. (PLCM Group, Inc. v. Drexler (2000) 22 Cal.4th 1084, 1095.) The trial judge has wide discretion, and appellate courts rarely disturb the number. In practice that means detailed billing records, reasonable rates for the market, and no padding. A fee motion built on block-billed entries and a rate the judge has never seen in that courthouse will be cut.

Two refinements matter to business clients. A company that litigates through in-house counsel recovers fees at market rates, even though it paid a salary rather than invoices. (PLCM Group, supra, 22 Cal.4th at pp. 1094, 1097.) A lawyer who represents himself recovers nothing, because he incurred no fees. (Trope v. Katz (1995) 11 Cal.4th 274, 292.) The Court of Appeal applied that rule in July 2026 to a law firm that sued a former client through one of its own attorneys. The firm's retainer agreement said it could recover fees even when self-represented. The court held the clause could not override the statute, and the firm took nothing for its own time. (The Law Firm of Fox and Fox v. Arteaga (2026) 121 Cal.App.5th 1249.)

Fees are not capped by the size of the judgment. In American Building Innovation, the fee award exceeded $1.55 million. A fee clause can make the fight over fees larger than the fight over the merits, which is one reason the clause changes settlement behavior so much.

How a section 998 offer changes the math

A statutory offer to compromise under Code of Civil Procedure section 998 interacts with the fee clause in a way that catches plaintiffs off guard. If a plaintiff rejects a defendant's 998 offer and then wins less at trial, the plaintiff keeps its preoffer fees but loses its postoffer fees, and it pays the defendant's postoffer costs. Where the contract has a fee clause, those postoffer costs include the defendant's attorney's fees. (Scott Co. v. Blount, Inc. (1999) 20 Cal.4th 1103, 1112-1114.) The plaintiff can win the case and still write a check.

The reverse is not true after a dismissal. A rejected 998 offer does not revive contract fees that subdivision (b)(2) has cut off. The tenant in Riverside Mining had made a valid offer, and still recovered no fees once the landlord dismissed. Our guide to section 998 offers covers how to structure the offer so it carries the fee consequence.

Deadlines: the fee motion most people file late

Contract fees are claimed by noticed motion, not by adding a line to the cost memorandum. The motion must be served and filed within the time for filing a notice of appeal. In an unlimited civil case that is normally 60 days after service of notice of entry of judgment, or 180 days after entry if no notice is served. (Cal. Rules of Court, rule 3.1702(b)(1); rule 8.104(a).) The parties can stipulate to extend the deadline, and the court can extend it for good cause, but neither happens by itself. Fees for an appeal are claimed by a separate motion after the remittitur, on a separate clock. (Rule 3.1702(c).)

I have seen judgments for several hundred thousand dollars where the fee motion was filed on day 75. The judgment stood. The fees were gone.

What I tell clients before they sign

Write the clause broadly if you expect to be the one enforcing the contract. "Arising out of or relating to this agreement" reaches fraud, interference, and the other tort claims that travel with a contract case. A clause limited to "enforcing this agreement" may not.

Write it narrowly if you expect to be the one defending. A supplier whose customers are likelier to sue it than the reverse may prefer a clause that stops at contract claims, or no clause at all. Remember that whatever you write becomes mutual.

If both sides have counsel, say so in the contract. That recital is the only way to keep a limited fee clause limited. Without it, section 1717 extends the clause to the entire agreement.

Address fees in every settlement agreement. State that each side bears its own, or state who pays and how much. Silence plus a dismissal means no fees for anyone.

Calendar the fee motion the day judgment is entered. Sixty days from notice of entry. Treat it as a jurisdictional deadline, because the courts do.

Think about the fee clause before you sue. A demand letter that quotes the clause and estimates the fee exposure changes the conversation with a counterparty who has not read its own contract. And before filing a marginal claim on a contract with a fee clause, run the numbers on losing. The cost of business litigation doubles when you are paying both sides.

Our breach of contract practice page covers how we evaluate these cases, including the fee exposure, before recommending suit.

Frequently asked questions

Can I recover attorney's fees in a California breach of contract case?

Only if the contract has a fee clause or a statute provides for fees. Without one, each side pays its own lawyer under Code of Civil Procedure section 1021. With a fee clause, Civil Code section 1717 awards reasonable fees to the party prevailing on the contract.

My contract says only the other side can recover fees. Does that mean I cannot?

No. Section 1717 makes every contractual fee clause reciprocal. If you prevail on the contract, you recover fees even though the clause named only the other party. The statute also voids any attempt to waive that right.

Who is the prevailing party if both sides win something?

The party that recovered greater relief on the contract claims, measured against what each side asked for. The judge has discretion to find no prevailing party when results are mixed. A lopsided outcome still has a winner, though. Courts have reversed findings of no prevailing party where one side recovered most of what it sought and the other recovered nothing.

Does a fee clause cover fraud or other tort claims?

Only if the clause is written broadly enough. Section 1717 applies to contract claims. A clause covering disputes "arising out of or relating to" the agreement usually reaches tort claims as well. A clause limited to enforcing the agreement usually does not.

What happens to fees if the case settles?

If the action is dismissed under a settlement, there is no prevailing party under section 1717 and no contract fees. The settlement agreement itself has to allocate fees, or each side absorbs its own.

What if the contract has no fee clause but the claim is on an open account?

Civil Code section 1717.5 allows limited fees in actions on a book account without a fee clause. As amended by AB 78, effective January 1, 2026, the cap for business accounts is the lesser of $1,600 or 25 percent of the principal owed, and $1,200 for consumer accounts. (Civ. Code, § 1717.5.) Banks and licensed lenders are excluded. For most commercial claims the number is small enough that it does not change the decision to sue.

This article is provided for general informational purposes and is not legal advice.

Need help? Contact Kolmogorov Law, P.C. at (909) 235-6420 or visit kolmogorovlaw.com to schedule a consultation with our business litigation team in Irvine, California.