Court of Appeals Tolls Bell for Unclear Attorney Fees Provisions
Writing in clear, plain language that the party is entitled to recover attorney fees in any situation will help to avoid potential litigation.
After reading the Court of Appeals decision in Sage Sys. v. Liss, 2022 NY Slip Op 05918 (decided on Oct. 20, 2022), transactional attorneys may get the chilling sense that they may have to initiate a sweep of all their clients’ agreements where they thought that attorney fees were recoverable. If the provision does not state “attorney fees”, whether in an indemnification agreement, partnership agreement (which was at issue in Sage), or in any agreement, the likelihood of litigating the recovery of fee has gone up exponentially. And really, the impact of this decision extends to all attorneys in every sector of New York practice where the recovery of attorney fees is contemplated. New York customary law can no longer be confidently relied upon in this area of the law.
This discussion of Sage, instead of starting with the factual specifics, will begin with the court’s admonishment to the drafting Bar: “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.”
If you already heed that caveat, then you can stop here. But if you believe that the broad language you use when drafting indemnification provisions (which does not explicitly allow for the prevailing party in an action between contracting parties to collect attorney fees) will be sufficient, then read on.
The Facts of ‘Sage’
Sage Systems and Robert Liss entered a partnership. The pertinent part of the partnership agreement is the indemnification provision, and provides, in relevant part:
The Partnership and the other Partners shall be indemnified and held harmless by each Partner 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 which is not performed in good faith or is not reasonably believed by such Partner to be in the best interests of the Partnership and within the scope of authority conferred upon such Partner under this Agreement, or which arises out of the fraud, bad faith, willful misconduct or negligence of such Partner.
Problems arose between the partners, and Liss unsuccessfully brought a partnership dissolution action. After the case was terminated, Sage commenced the underlying action against Liss seeking attorney fees and costs incurred defending that dissolution action.
On a motion for summary judgment, Sage Systems claimed that Liss, by agreeing to the broad indemnification provision in their partnership agreement, referenced above, was contractually obligated to reimburse Sage Systems for its attorney fees. The motion court agreed. On appeal to the Appellate Division, the First Department found that Sage Systems was damaged by having to defend itself, incurring legal costs in that action, and held that the broad language of the indemnification agreement encompassed the recovery of attorney fees. Sage Sys. v. Liss. 193 A.D.3d 624 (1st Dept. 2021). Liss appealed to the Court of Appeals.
Oral Argument, Sept. 22, 2022
Counsel for Sage Systems argued that because “nothing related to attorneys’ fees or defensive action in any way is referenced at all in this provision,” attorney fees should not be recoverable.
Judge Rivera asked counsel for Liss, “If it didn’t have the word damages, could you recover damages?”
Liss’s counsel responded, “No. If it — it has to say damages, otherwise, that — that’s the broadest of all.”
Judge Rivera: “So if it doesn’t say attorneys’ fees, why should attorneys’ fees be covered?”
Mr. Seeman: “Because attorneys’ fees are a subset of damages. In this instance, the only damage we — the only damage we suffered was attorneys’ fees. That’s why it’s recoverable here, with this clause.”
Tr. 21, 22 (Oral Argument can be viewed on the Court of Appeals website.)
The Court of Appeals reversed and rejected Sage System’s argument, concluding that the provision at issue lacked express language or indicia of the parties’ “unmistakably clear” intent to indemnify each other for attorney fees in an action between them on the contract.
The court explained that 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 court went on to note that “[t]he 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.”
Significantly, the decision cautions that, to the extent that some lower courts presume that broadly worded indemnification provisions by their nature are intended to cover attorney 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.”
The case was dismissed and Sage System will not be able to recover attorney fees.
Going forward, does the fact that an agreement doesn’t say attorney fees, still permit such a recovery? The answer is yes. One of the cases briefed by the parties in Sage Systems and addressed by the court during oral argument was Breed, Abbott & Morgan v. Hulko, 74 N.Y.2d 686 (1989). In that case, the agreement at issue involved an escrowee indemnification clause that made no mention of attorney fees, yet allowed recovery.
The Sage Systems court did not overrule Breed, but it is limited to its facts. There is not much analysis provided by the Court of Appeals in that decision, which states as follows: “for the reason stated in the opinion of the late Justice Leonard H. Sandler that it is ‘difficult, if not impossible to ascertain’ what the indemnification clause would cover other than attorney’s fees in suits between the parties. Breed, 39 A.D.2d 71.
The escrowee indemnification provision stated that “the parties hereby indemnify the escrowee and hold the escrowee harmless from any claims, damages, losses or expenses arising in connection herewith.” Attorney fees were not mentioned anywhere.
What will be helpful to a litigant arguing against the foreclosure of fees because of the failure to specify attorney fees, the Appellate Division decision “cit[es] a long, uninterrupted line of decisions which have interpreted broadly worded indemnification clauses as embracing the right to reimbursement for counsel fees.”
For litigation purposes, and to fully understand the Sage System rationale, and in addition to Breed, these are the cases to know:
• Hooper Assoc. v. AGS Computers, 74 N.Y.2d 487, 491 (1989), where the court held: “Inasmuch as a promise by one party to a contract to indemnify the other for attorney’s fees incurred in litigation between them is contrary to the well-understood rule that parties are responsible for their own attorney’s fees, the court 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 Hooper agreed to purchase computer equipment and services from defendant.”
Hooper successfully sued for breach of the contract and the question submitted to the court was whether the contract’s indemnity clause entitled Hooper to recover counsel fees incurred in prosecuting the action against defendant also. The Hooper court held that because of the lack of specificity at to what circumstances attorney fees could be recovered, that it did not.
• Ambac Assur. v. Countrywide Home Loans, 31 N.Y.3d 569 (2018) (applying Hooper): Attorney fees are treated as incidents of litigation, rather than damages.
In view of Sage Systems, to assure that a party can contractually recover attorney fees, in a contractual relationship, including as an escrowee, prevailing party or indemnitee, the drafting attorney must use unmistakably clear words indicating that the parties agree to deviate from the American Rule concerning attorney fee shifting.
• The drafter should include a separate clause related to direct actions.
• The drafter should include a separate clause related to third-party actions
• The drafter should include a separate clause related to actions or proceedings of any kind involving the retention of legal counsel.
• The drafter should include a separate clause related to reasonable costs (court fees, expert fees, transcripts, etc.).
Writing in clear, plain language that the party is entitled to recover attorney fees in any situation will help to avoid potential litigation on that issue.
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Joseph D. Nohavicka
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