May a party to a contract recover attorneys’ fees under an indemnification provision of the agreement? That was the question facing an appellate court in Gotham Partners, LP v. High River Limited Partnership.
In Batsidis v. Wallack Management Co., Inc., et. al. (reported in the September 2009 “Case Notes”), the appellate court for Bronx County and New York County interpreted a legal fee provision contained in an alteration agreement and determined that a co-op can charge a shareholder for costs the co-op incurred in connection with the shareholder’s apartment alteration, in that case, in the absence of litigation. Although Gotham Partners did not involve an attorneys’ fees clause in an alteration agreement or a co-op or condo governing document, the same appellate court provided an important, further analysis of when parties to a contract (including a proprietary lease, alteration agreement,or condominium bylaws) could recover attorneys’ fees.
Defendant High River Limited Partnership entered into a purchase agreement to purchase from Gotham Partners, LP, Gotham’s limited partnership interest in Hallwood Realty Partners, LP, for roughly $18.8 million. The agreement provided for an additional purchase price if High River sold or otherwise transferred the interest for a higher price within 36 months of the purchase date. Hallwood merged with another entity within 36 months so that – after litigation – High River was required to pay Gotham additional money.
Gotham then sought an award of attorneys’ fees and expenses in excess of $700,000, which it incurred in suing High River for the additional purchase price. This was based on an indemnification clause in their agreement, which stated, in part: “(a) [High River] agrees to indemnify and hold [Gotham] harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including reasonable fees and expenses of counsel) which may at any time be imposed on, incurred by or asserted against [Gotham], as the result of any action taken by (or failure to act of) [High River] following the execution and delivery of this Agreement with respect to, or associated or in connection with, [Hallwood] or [High River]’s interests [in Hallwood] . . . (provided, that for avoidance of doubt, such obligation of [High River] shall not arise out of the entry of the parties into this Agreement or any breach by [Gotham] of any of [its] representations, warranties, covenants or agreements hereunder).”
The appellate court explained the general rules concerning payment of legal fees. The courts followed the “American Rule,” which precludes the prevailing party from recovering legal fees from the losing party unless they were authorized by statute, an agreement or a court rule. The court also explained that lawyers have attempted to parse indemnification provisions in agreements to provide for attorneys’ fees for the winning side. However, the court explained that the language of the clause relied upon by the prevailing party must make it “unmistakably clear” that the winning side should be awarded such fees.
The appellate court reviewed a prior case decided by New York State’s highest court, the Court of Appeals. In that case, the Court of Appeals examined an indemnification provision in a contract which required the 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.”
The Court of Appeals found that the above provision could not have been interpreted to cover costs arising out of a litigation between the parties. The Gotham court discussed the rule that when a party is under no legal duty to indemnify, a contract which contains an indemnification provision had to be strictly construed to “avoid reading into it a duty which the parties did not intend.”
The lower court in Gotham discussed the indemnification provision in the agreement and, after it analyzed all of the terms of the provision, determined that Gotham was entitled to collect attorneys’ fees based upon the indemnification provision. The lower court found that the language in the agreement was “unmistakably clear” that the parties intended for High River to indemnify for its breach of the agreement, including to pay Gotham for its attorneys’ fees.
The appellate court, however, disagreed. It determined that the indemnification provision was framed in language typical of those which contemplate reimbursement when damages are made by a third party, i.e., not a party to the agreement.
The court found that Gotham’s argument in favor of an award of attorneys’ fees, and its interpretation of the contract, was not irrational. Rather, the court found that the Court of Appeals imposed a very strict standard. It found that for an indemnification clause to serve as an attorneys’ fees provision with respect to disputes between the parties to the contract, the provision must unequivocally be meant to cover claims between the contracting parties rather than third-party claims.
The court explained that the “bottom line” was that a contract provisions that employed third?party claim indemnification language could not be read broadly to encompass an award of attorneys’ fees to the prevailing party, based on the other party’s breach of the contract, unless the agreement specifically and explicitly said so. The intention to authorize an award of attorneys’ fees to the prevailing party in this circumstance would have had to be “virtually inescapable.”
Comment: In this case, and in the Batsidis case, the appellate court for Bronx and New York Counties prescribed the circumstances under which parties to a contract (including, we believe, proprietary leases, alteration agreements and bylaws) can obtain an award of attorneys’ fees. Batsidis specifically addressed the circumstance where there was no litigation, yet fees were expended as a result of a particular shareholder’s alteration. Given the clear language in an attorneys’ fees provision in the alteration agreement at issue in that case, attorneys’ fees were awarded. Gotham addressed what happens when there is no applicable attorneys’ fees clause but a party attempts to obtain an award of such fees relying on an indemnification provision in the contract.
What we take from these cases is that if the language in an attorneys’ fees section in the agreement is clear and unequivocal, it will be interpreted according to its meaning. If, however, a party seeks attorneys’ fees based upon a contract’s indemnification provision (rather than a section addressing legal fees specifically), the language of the indemnification provision must be specific and explicit that it was intended to apply where one party to a contract prevails in a lawsuit and seeks attorneys’ fees from the other.
Given the recent case law concerning attorneys’ fees and the interpretation of different contractual provisions, we suggest that boards ask their counsel to review the provisions in their governing documents and alteration agreements in order to make sure the documents are in line with the most recent rulings.
For Plaintiffs: Dechert LLP
For Defendants: Morrison Cohen LLP