Central Coast Development Company owned a parcel of land in the City of Pismo Beach. The Company wished to construct a variety of residences on the land and applied to the City for a permit. The City granted the permit. The City and the Company then went to the San Luis Obispo Local Agency Formation Commission (LAFCO) and filed an application to annex the property.
This application contained an indemnification clause dictating that in the event of legal action related to the application, the City and Company would indemnify, or pay back, LAFCO’s legal fees and costs.
LAFCO denied the application and the City and Company sued. LAFCO prevailed and requested more than $400,000 in attorneys’ fees. The City and Company refused to pay and a variety of litigation ensued, with each party attempting to recover attorneys’ fees and costs from the other. Eventually, the Court of Appeal determined that the original indemnification agreement was not valid because LAFCO lacked authority to require indemnification.
However, at the same time, the City and Company attempted to sue LAFCO for their attorneys’ fees under a different theory based on Civil Code Section 1717. The trial court granted the suit and awarded fees. LAFCO promptly appealed, contending that Civil Code Section 1717 did not apply to the original contract and the original contract was also invalid. The Court of Appeal sided with LAFCO and held that a public agency contract that exceeds the agency’s statutory powers is void and will not support a fee award pursuant to Civil Code Section 1717.
In making this determination, the Court of Appeal stated that, if a public agency is not authorized to make an agreement, the agreement is void and the public agency may neither enforce nor be liable on the contract. It had been previously determined that the original indemnification agreement was invalid and therefore, LAFCO, the public agency, was not authorized to make the agreement.
The Court of Appeal held that because it is beyond LAFCO’s powers to bind itself or an applicant to the attorneys’ fee agreement at issue, Section 1717 cannot apply.
San Luis Obispo Local Agency Formation Comm’n v. Cent. Coast Dev. Co., 78 Cal.App.5th 363 (2022).
Note:
Public entities should take care to not promise or demand anything in a contract that is outside their power.