On October 20, 2022, the Court of Appeals issued a decision in Sage Sys., Inc. v. Liss, 2022 NY Slip Op. 05918, denying an award of fees in a partnership dispute based on the high standard for finding that a contractual indemnification provision allows the prevailing party to recover fees in a suit between the parties, explaining:
Under the American Rule, attorney’s fees are incidents of litigation and a prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties, statute or court rule. The American Rule is intended to increase free access to the courts for those who would otherwise be discouraged from seeking judicial redress of wrongs for fear of having to pay a defendant’s attorney’s fees. The Rule was originally derived from federal legislation passed in 1853 which recognized that losing litigants were being unfairly saddled with exorbitant fees.
The 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. 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.
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. 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. 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. 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. The Court concluded that the clause was a typical, broadly worded indemnity provision, which referred to subjects that give rise to third-party claims. Moreover, none of the bases supporting an action for indemnity were exclusively or unequivocally referable to claims between the parties themselves or supported an inference that defendant promised to indemnify plaintiff for counsel fees in an action on the contract. Thus, the agreement was devoid of language clearly permitting plaintiff to recover from defendant the attorney’s fees incurred in a suit against defendant.
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 . . . .
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. 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. 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.
Parties must determine how best to articulate their agreement to ensure their intentions are clear. However, inclusion of clear language stating that the prevailing party is entitled to recover attorney’s fees in an action between the parties would avoid potential litigation on the issue.
(Internal quotations and citations omitted).