Does our indemnity clause let us recover the attorney's fees we spend suing the other side?
Almost certainly not, unless the clause says so in terms. New York follows the rule that each party bears its own attorney's fees, and a promise to indemnify the other party is read against that background: because a promise to indemnify for fees incurred in litigation BETWEEN the parties is contrary to that well-understood rule, a court will not infer an intention to waive it unless the intention is unmistakably clear from the language of the promise. In Hooper a clause to indemnify and hold harmless 'from any and all claims, damages, liabilities, costs and expenses, including reasonable counsel fees' did not reach fees in the promisee's own suit against the promisor, because none of its subjects was exclusively or unequivocally referable to claims between the parties themselves, and because reading it to cover an inter-party suit would have made the contract's own tender provision meaningless: article 9(D) required the promisee to notify the promisor of 'any claim or litigation' to which the indemnity applied and let the promisor assume the defence, which has no logical application to a suit between the two of them. The Court reversed, granted the promisor summary judgment and answered the certified question in the negative. The clause still covered counsel fees the promisee incurred in DEFENDING third-party claims; it was the fees of prosecuting its own suit that it could not recover, even though it won that suit.
The trap
The clause that fails here is the one every drafter copies. Hooper's indemnity ran to 'any and all claims... including reasonable counsel fees', and the Court of Appeals still held it did not permit recovery of fees in the plaintiff's own suit against the defendant, because nothing in it was exclusively or unequivocally referable to claims between the parties. If inter-party fee shifting is intended in New York, the promise must make that intention unmistakably clear, but the vehicle can be an indemnity: Hooper itself says counsel fees 'may be indemnified in this way', citing Breed, Abbott & Morgan v Hulko as an indemnity that covered the legal expenses of resisting the other party's claims. What fails is language whose subjects are not exclusively or unequivocally referable to claims between the parties, and a notice-and-assumption-of-defence provision sitting beside the indemnity is affirmative evidence against you, because it would be meaningless in a suit between the parties. The reading is strict in both directions: an assumed indemnity obligation is strictly construed and the promise will not be found unless it can be clearly implied from the language and purpose of the ENTIRE agreement and the surrounding facts and circumstances. A footnote in Hooper names one more route for a drafter who wants inter-party fees: provide for payment as a form of liquidated damages, enforceable so long as it is not unconscionable.
8 authorities
- case74 N.Y.2d 487Hooper Associates Ltd. v. AGS Computers, Inc.N.Y.decided 1989read it at the source ↗
The words that state the rule
Words in a contract are to be construed to achieve the apparent purpose of the parties. Although the words might "seem to admit of a larger sense, yet they should be restrained to the particular occasion and to the particular object which the parties had in view” (Robertson v Ongley Elec. Co., 146 NY 20, 23 ). This is particularly true with indemnity contracts. When a party is under no legal duty to indemnify, a contract assuming that obligation must be strictly construed to avoid reading into it a duty which the parties did not intend to be assumed (Levine v Shell Oil Co., 28 NY2d 205, 211 ; Kurek v Port Chester Horn. Auth., 18 NY2d 450, 456 ). The promise should not be found unless it can be clearly implied *492 from the language and purpose of the entire agreement and the surrounding facts and circumstances (Niagara Frontier Transp. Auth. v Tri-Delta Constr. Corp., 107 AD2d 450, 452 , affd for reasons stated in opn of Justice M. Dolores Denman 65 NY2d 1038 ; Margolin v New York Life Ins. Co., 32 NY2d 149, 153 ; Inman v Binghamton Hous. Auth., 3 NY2d 137, 147 ). 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 (see, Tokyo Tanker Co. v Etra Shipping Corp., 142 AD2d 377, 378 ; Carr v First Fed. Sav. & Loan Assn., 132 AD2d 513, 514 ).
- case74 N.Y.2d 487Hooper Associates Ltd. v. AGS Computers, Inc.N.Y.decided 1989read it at the source ↗
The words that state the rule
The clause in this agreement does not contain language clearly permitting plaintiff to recover from defendant the attorney’s fees incurred in a suit against defendant. On the contrary, it is typical of those which contemplate reimbursement when the indemnitee is required to pay damages on a third-party claim. It obligates defendant to "indemnify and hold harmless [plaintiff] * * * from any and all claims, damages, liabilities, costs and expenses, including reasonable counsel fees” arising out of breach of warranty claims, the performance of any service to be performed, the installation, operation and maintenance of the computer system, infringement of patents, copyrights or trademarks and the like. All these subjects are susceptible to third-party claims for failures in the installation or operation of the system. None are exclusively or unequivocally referable to claims between the parties themselves or support an inference that defendant promised to indemnify plaintiff for counsel fees in an action on the contract.
- case74 N.Y.2d 487Hooper Associates Ltd. v. AGS Computers, Inc.N.Y.decided 1989read it at the source ↗
The words that state the rule
Our interpretation also is supported by other provisions in the contract which unmistakably relate to third-party claims. Thus, article 9 (D) requires plaintiff to "promptly notify” defendant of "any claim or litigation to which the indemnity set forth in Sub-Paragraph 9 (A) shall apply” and it further provides that defendant "may assume the defense of any such claim or litigation with counsel satisfactory to [plaintiff].” To extend the indemnification clause to require defendant to reimburse plaintiff for attorney’s fees in the breach of contract action against defendant would render these provisions meaningless because the requirement of notice and assumption of *493 the defense has no logical application to a suit between the parties. Construing the indemnification clause as pertaining only to third-party suits affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect (see, Corhill Corp. v S. D. Plants, 9 NY2d 595, 599 ).
- case74 N.Y.2d 487Hooper Associates Ltd. v. AGS Computers, Inc.N.Y.decided 1989read it at the source ↗
The words that state the rule
Plaintiff successfully sued for breach of the contract and the question submitted to us, by leave of the Appellate Division, is whether the contract’s indemnity clause entitles plaintiff to recover counsel fees incurred in prosecuting the action against defendant also. We hold that it does not.
- case74 N.Y.2d 487Hooper Associates Ltd. v. AGS Computers, Inc.N.Y.decided 1989read it at the source ↗
The words that state the rule
Under the general 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 (see, Matter of A. G. Ship Maintenance Corp. v Lezak, 69 NY2d 1, 5 ; Mighty Midgets v Centennial Ins. Co., 47 NY2d 12, 21-22 ; City of Buffalo v Clement Co., 28 NY2d 241, 262-263 ). 2 It is not uncommon, however, for parties to a contract to include a promise by one party to hold the other harmless for a particular loss or damage and counsel fees are but another form of damage which may be indemnified in this way (see, e.g., Breed, Abbott & Morgan v Hulko, supra; Brooklyn Union Gas Co. v Shields Detective Bur., 121 AD2d 587, 590 , appeal denied 69 NY2d 610 ; Rosano’s Farm Store v International Collection Serv., 115 AD2d 195, 196 ; Lavorato v Bethlehem Steel Corp., 91 AD2d 1184, 1185 ; see also, Zissu v Bear, Stearns & Co., 805 F2d 75, 79-80; Atlantic Richfield Co. v Interstate Oil Transp. Co., 784 F2d 106, 115, cert denied 479 US 817 ). In the contract before us the parties provided that defendant must indemnify plaintiff for "reasonable counsel fees”. They failed to define the scope of defendant’s promise, however, and thus, we must interpret the language and determine whether it is limited to attorney’s fees incurred by plaintiff in actions involving third parties or also includes those incurred in prosecuting a suit against defendant for claims under the contract.
- case74 N.Y.2d 487Hooper Associates Ltd. v. AGS Computers, Inc.N.Y.decided 1989read it at the source ↗
The words that state the rule
One method of providing for attorney’s fees in actions between the parties is to provide for payment as a form of liquidated damages. Such fees are enforceable if they are not unconscionable (see, Equitable Lbr. Corp. v IPA Land Dev. Corp., 38 NY2d 516 ).
- case74 N.Y.2d 487Hooper Associates Ltd. v. AGS Computers, Inc.N.Y.decided 1989read it at the source ↗
The words that state the rule
In Breed, Abbott defendant Hulko contracted to purchase a home from another. Plaintiff acted as escrow agent for the parties, holding Hulko’s down payment for delivery to the seller if he defaulted. The contract contained an indemnification agreement which provided that Breed, Abbott would not be liable to either party to the sale " 'for any act or omission except for bad faith or gross negligence’ ” and that it would be indemnified and held " 'harmless from any claims, damages, losses or expenses arising in connection [^herewith.’ ” (Breed, Abbott & Morgan v Hulko, 139 AD2d 71, 72 , supra.) Hulko defaulted on the contract of sale and Breed, Abbott delivered the down payment to the sellers. Hulko then sued Breed, Abbott, claiming that its release to the sellers of the escrow down payment was wrongful. Breed, Abbott prevailed and subsequently commenced an action to recover the legal expenses it incurred in defending against Hulko’s claim. The Appellate Division reversed Supreme Court’s dismissal of the complaint and we affirmed, finding that defendant Hulko had agreed to indemnify plaintiff for the legal expenses it incurred in resisting his claims ( 74 NY2d 686, 687 , supra). Our affirmance in Breed, Abbott did not signal any departure from settled rules. We affirmed the Appellate Division’s decision on the narrow ground that the intent of the parties was manifest: if the promise to indemnify Breed, Abbott did not extend to " 'legal expenses incurred in defending against an action by one of the parties alleging misconduct by the escrowee which resulted in a determination in favor of the escrowee’ ”, it was " 'difficult, if not impossible, to ascertain for what it was that the parties had agreed to indemnify the escrowee.’ ” ( 74 NY2d, at 687 , quoting from 139 AD2d, at 73 .)
- case74 N.Y.2d 487Hooper Associates Ltd. v. AGS Computers, Inc.N.Y.decided 1989read it at the source ↗
The words that state the rule
In this case, however, the potential existed for third-party actions seeking lost profits, personal injury or property damages from plaintiff due to a malfunction of the computer resulting from defendant’s improper installation or design. The indemnity clause clearly covers those circumstances and permitted plaintiff to seek indemnity from defendant for the counsel fees incurred in defending such claims. Accordingly, the order of the Appellate Division should be reversed, with costs, defendant’s motion for summary judgment granted and the certified question answered in the negative.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.