Indemnification Provision Alone Is Not Enough To Allow Recovery of Attorneys’ Fees Between Contracting Parties
In a series of recent appellate cases, the Courts have made clear that indemnification provisions in contracts cannot be construed broadly to allow parties to the contract to recover attorneys’ fees from each other. As stated by New York’s highest Court in U.S. Underwriters Ins. Co. v. City Club Hotel, in New York State “and indeed, in the rest of the country, the longstanding ‘American rule’ precludes the prevailing party from recouping legal fees from the losing party ‘except where authorized by statute, agreement or court rule’” In the seminal 1989 Court of Appeals’ decision, Hooper Assoc., Ltd. v. AGC Computers, Inc., the Court established that the indemnification clause did not require defendant in a contract dispute to reimburse plaintiff for attorney’s fees in a breach of contract action against defendant. Two recent appellate division cases reaffirmed the strict standard established by the Hooper Assoc. Court.
The Appellate Division, First Department in Gotham Partners, L.P. v. High River Ltd. Ptnership, ruled that the language of the indemnification provision in that case “falls short of satisfying the exacting standard” established by Hooper Assoc. mandating that “for an indemnification clause to cover claims between the contracting parties rather than third-party claims, its language must unequivocally reflect that intent.” The Court ruled that the indemnification clause, like the one considered by Hooper Assoc., is framed in language relevant to a third-party claim. The Court noted that the parties were well aware of how to frame an enforceable attorneys’ fees provision, but that there was not a similar provision relating to claims between the parties to the contract.
In rejecting plaintiffs’ argument that it could rely upon the general indemnification provision, the First Department ruled that “[t]he problem with plaintiffs’ position is not that their interpretation is irrational; it is that the strict standard imposed by Hooper requires more than that. For an indemnification clause to serve as an attorney’s fee provision with respect to disputes between the parties to the contract, the provision must unequivocally be meant to cover claims between the contracting parties rather than third party claims.” The Court explained that the Hooper standard “requires more than merely an arguable inference of what the parties must have meant; the intention to authorize an award of fees to the prevailing party in such circumstances must be virtually inescapable.”
Similarly, the Appellate Division, Second Department in Adesso Café Bar & Grill, Inc. v. Burton, very recently ruled that the indemnification language in the contract was “not so ‘unmistakably clear’ as to read into the contract the obligation that defendants were to indemnify plaintiffs for the attorney’s fees incurred by the plaintiffs.” There, plaintiffs and defendants entered into a contract whereby the plaintiffs purchased the leasehold and assets of defendants’ business and “[a]mong the contract’s many provisions was an indemnification” provision. After the closing, plaintiffs commenced an action for breach of contract, fraud and material misrepresentation arising from defendants’ alleged numerous material representations and sought an award of its attorneys’ fees.
In affirming the lower court’s denial of the request for attorneys’ fees, the Second Department extensively cited from the holding in Hooper Assoc. The Second Department ruled that its determination that the contract’s indemnification language was “not so ‘unmistakably clear’ as to read into the obligation” that defendants were to indemnify the plaintiffs for their attorneys’ fees in prosecuting the action against defendants, was “bolstered by the fact that the provisions within the second part of the contract’s indemnification clause, entitled “Procedure” are inconsistent with a lawsuit between the parties themselves.” Thus, the Second Department ruled that “[w]here ‘the language of the parties is not clear enough to enforce an obligation to indemnify, [the courts] are unwilling to rewrite the contract and supply a specific obligation the parties themselves did not spell out.”
Thus, based upon these two recent appellate cases, it is clear that an indemnification provision must be “unmistakably clear” to also relate to claims between the parties and not simply the typical third-party claims.
