The American Rule
The Court of Appeals in Sage Systems, Inc. v. Liss took the opportunity to remind practitioners that when contracting to supersede the American Rule to costs of litigation — “a prevailing party… generally may not recover attorney’s fees from the losing party” — the clause must contain “express language or indicia of the parties’ unmistakably clear intent to indemnify each other for attorney’s fees in an action between them on the contract”.
An Unlimited Indemnity Is Insufficient
The language examined by the Court of Appeals stated, 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.
The party arguing in favor of the imposition of attorney’s fees submitted that “the indemnification provision’s broad, unrestrictive language demonstrates the parties’ clear intent to provide attorney’s fees related to direct claims between them”.
However, the Court of Appeals strongly held that attorney’s fees clauses must be specific and cannot be assumed to be part of a catch-all indemnity.
Attorney’s Fees Provisions Must Be Specific
Reaching back to its earlier decision, Hooper Associates Ltd v. AGS Computers, Inc., the Court stayed true to its longstanding rule — “[a] court should not infer a party’s intention to waive the benefit of [the American Rule] unless the intention to do so is unmistakably clear from the language of the promise”.
Stated otherwise, even an unlimited and unrestricted indemnity which appears to cover all out-of-pocket costs does not cover attorney’s fees between the parties unless specifically stated.
Indeed, the Court of Appeals in Sage offered cautionary advice to practitioners:
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.
Does Your Agreement Accomplish Your Goals?
To the layman, the unlimited and unrestricted indemnity contained in the Sage partnership agreement appears to cover all out-of-pocket costs incurred due to the actions, or inactions, of a partner. However, the diligent practitioner will know that fee shifting provisions require exacting specificity to accomplish their client’s goal. Does your contract accomplish yours?