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THE INDEMNIFICATION CLAUSE IN THE PARTNERSHIP AGREEMENT DID NOT INCLUDE “UNMISTAKABLY CLEAR” LANGUAGE INDICATING THE WAIVER OF THE “AMERICAN RULE” REQUIRING EACH PARTY TO PAY THAT PARTY’S OWN ATTORNEY’S FEES; PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES ASSOCIATED WITH DEFENDANT’S UNSUCCESSFUL DISSOLUTION ACTION (CT APP).

​The Court of Appeals, in a full-fledged opinion by Judge Rivera, reversing the appellate division, determined the indemnification clause in the partnership agreement did not serve to waive the “American Rule” that each party is responsible for that party’s own attorney’s fees. The indemnification clause states: “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.” Here defendant had brought an unsuccessful dissolution action and plaintiff argued defendant was obligated to pay plaintiff’s attorney’s fees because the indemnification clause waived the American Rule:

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 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 … . * * *

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.  Sage Sys., Inc. v Liss, 2022 NY Slip Op 05918, CtApp 10-20-22

Practice Point: Unless “unmistakably clear” language in a contract indicates an one party’s agreement to pay another party’s attorney’s fees, the American Rule applies and each party pays that party’s own attorney’s fees.

 

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