Fee Shifting Between Partners Denied Without “Unmistakably Clear” Language of Intent

In a decision dated October 20, 2022, in Sage Systems, Inc. v. Liss, 2022 NY Slip Op 05918, the New York Court of Appeals reversed the Appellate Division and rejected plaintiff’s argument that a broad, unrestrictive indemnification provision in the partnership agreement entitled it to attorney’s fees related to direct claims between the partners. The Court explained:

The [American] Rule is straightforward enough, but in the context of private agreements to avoid the Rule, courts have had to determine the intent of vague fee-shifting language and broad indemnification provisions that do not explicitly allow for the prevailing party in an action between contracting parties to collect attorney’s fees (see e.g. Gotham Partners, L.P. v High Riv. Ltd. Partnership, 76 AD3d 203 [1st Dept 2010], lv denied 17 NY3d 713 [2011]; West Vernon Petroleum Corp. v Singer Holding Corp., 103 AD3d 623 [2d Dept 2013]; Episcopal Church Home & Affiliates Life Care Community, Inc. v Gates Circle Holdings, LLC, 203 AD3d 1706 [4th Dept 2022]). To the extent that some of these decisions presume that broadly worded indemnification provisions by their nature are intended to cover attorney’s fees in direct party actions, they deviate from this Court’s exacting standard that the agreement must contain “unmistakably clear” language of the parties’ intent to encompass such actions (see Hooper, 74 NY2d at 492).

In Hooper, the plaintiff successfully sued the defendant for breach of contract and, in the same action, also sought reimbursement for its attorney’s fees. The plaintiff relied on an indemnity clause in the parties’ agreement that the defendant would pay for the plaintiff’s “reasonable attorney’s fees” (id. at 490).5 In rejecting plaintiff’s claim, the Court explained that the parties “failed to define the scope of [the] defendant’s promise” and thus it was necessary to determine whether the clause was limited to fees incurred in a third-party action or a direct suit against the defendant under the contract (id.). The Court reasoned that because the parties were under no legal duty to indemnify, the indemnity clause must be strictly construed to avoid reading into the contract “a duty which the parties did not intend to be assumed” (id.). The Court further explained that because application of that indemnity agreement to direct actions between contracting parties would be contrary to the American Rule, courts “should not infer a party’s intention to waive the benefit of the rule unless the intention to do so is unmistakably clear from the language of the promise” (id. at 492). The Court concluded that the clause was a typical, broadly worded indemnity provision, which referred to subjects that give rise to third-party claims (id.). Moreover, “none [of the bases supporting an action for indemnity were] exclusively or unequivocally referable to claims between the parties themselves or support[ed] an inference that defendant promised to indemnify plaintiff for counsel fees in an action on the contract” (id.). Thus, the agreement was devoid of language “clearly permitting plaintiff to recover from defendant the attorney’s fees incurred in a suit against defendant” (id.; see also Ambac Assur. Corp. v Countrywide Home Loans, Inc., 31 NY3d 569 [2018] [applying Hooper]).

Here, the indemnification provision makes no explicit mention that partners may recoup attorney’s fees in an action on the contract. Nor is there any basis to infer the provision is limited to actions between the partners. The indemnification provision broadly applies to all types of actions, providing that “the partnership and other partners shall be indemnified and held harmless from and against any and all claims, demands, liabilities, costs, damages, expenses and causes of action of any nature whatsoever arising out of or incidental to any act performed by a Partner [not performed in good faith or not reasonably believed to be in the Partnership’s best interest and within the Partner’s authority]” (emphasis added). This language is not limited to actions between the partners but encompasses actions involving third parties. It is limited in scope only by the requirement that the partner have committed some misconduct. Indeed, the provision is broader than the indemnity clause in Hooper (see 74 NY2d at 491). It is also unlike the provision in Breed, Abbott & Morgan v Hulko; here, it is not “difficult, if not impossible to ascertain” what the indemnification clause would cover other than attorney’s fees in suits between the parties (74 NY2d 686, 687 [1989]). In sum, nothing in the provision nor the agreement as a whole makes “unmistakably clear” that the partners intended to permit recovery for attorney’s fees in an action between them on the contract (id. at 487).

In this country, the prevailing party in litigation generally may not recover attorney’s fees from the losing party. Parties may waive this rule but, as this case shows, they must be clear about the scope of their intent. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning indemnification provisions and fee shifting.