Award of Attorney’s Fees With No Basis In Contract, Statute Or Court Rule Reversed On Appeal by The Second Department

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Posted on: Dec 16 2024

In almost every litigation, the question that clients most often ask is whether they can get back their attorney’s fees. As we have explained in past articles (e.g., here, here, and here), attorney’s fees are not generally recoverable in litigation under the “American Rule”.

The American Rule “was originally derived from federal legislation passed in 1853 which recognized that ‘losing litigants were being unfairly saddled with exorbitant fees.’”[1] 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.”[2]

“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.”[3] As explained by the Court of Appeals, the American Rule “reflects a fundamental legislative policy decision that, save for particular exceptions or when parties have entered into a special agreement, it is undesirable to discourage submission of grievances to judicial determination and that, in providing freer and more equal access to the courts, the present system promotes democratic and libertarian principles.”[4]

“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.”[5] The Court of Appeals recently addressed this issue, holding that courts examining “broadly worded indemnification provisions”, which “by their nature are intended to cover attorney’s fees in direct party actions,” must hue to the “Court’s exacting standard that the agreement must contain ‘unmistakably clear’ language of the parties’ intent to encompass such actions.”[6]

In Hooper Assoc. v. AGS Computers, the plaintiff successfully sued the defendant for breach of contract and, in the same action, also sought reimbursement for its attorney’s fees. The plaintiff relied on an indemnity clause in the parties’ agreement that the defendant would pay for the plaintiff’s “reasonable attorney’s fees”.[7] In rejecting the plaintiff’s claim, the Court of Appeals explained that the parties “failed to define the scope of [the] defendant’s promise” and thus it was necessary to determine whether the clause was limited to fees incurred in a third-party action or a direct suit against the defendant under the contract.[8] The Court reasoned that because the parties were under no legal duty to indemnify, the indemnity clause must be strictly construed to avoid reading into the contract “a duty which the parties did not intend to be assumed.”[9] The Court further explained that because application of that indemnity agreement to direct actions between contracting parties would be contrary to the American Rule, courts “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.”[10] The Court concluded that the clause was a typical, broadly worded indemnity provision, which referred to subjects that give rise to third-party claims.[11] “None [of the bases supporting an action for indemnity were] exclusively or unequivocally referable to claims between the parties themselves or support[ed] an inference that defendant promised to indemnify plaintiff for counsel fees in an action on the contract.”[12] Thus, the agreement was devoid of language “clearly permitting plaintiff to recover from defendant the attorney’s fees incurred in a suit against defendant.”[13]

In Wolf v. Vestra SPV3, LLC, 2024 N.Y. Slip Op. 06232 (2d Dept. Dec. 11, 2024) (here), a case in which the issue of entitlement to attorney’s fees was decided using the principals discussed above, the Appellate Division, Second Department reversed a money judgment that included an award of attorneys’ fees because the contract between the parties did not provide for the recovery of attorneys’ fees that resulted from litigation.

Wolf concerned an action to recover damages for breach of contract arising from an agreement providing that, inter alia, defendant would purchase plaintiff’s membership interest in a certain company in the event that plaintiff’s employment with that company was terminated for any reason.

Plaintiff commenced the action by motion for summary judgment in lieu of a complaint pursuant to CPLR 3213, alleging that defendant refused to purchase her membership interest after her employment was terminated, and also sought an award of attorneys’ fees. In an order entered October 21, 2022, the motion court, among other things, granted that branch of plaintiff’s motion which was for an award of attorneys’ fees and directed plaintiff to submit a money judgment consistent with the order. Subsequently, a money judgment was entered on February 1, 2023, upon the order, in favor of plaintiff and against defendant, representing the amount sought and attorneys’ fees.

Defendant appealed, arguing that the agreement at issue did not contain an attorneys’ fees provision. Relying on, inter alia, Sage Systems and Hooper Associates, Defendant explained that there was nothing in the agreement to indicate that the parties bargained for or intended to permit recovery for attorney’s fees between them in an action related to the agreement. In fact, noted defendants, plaintiff did not argue for a statutory basis or court rule for the award of attorney’s fees. The motion court simply awarded such relief, said the defendant. [14]

As noted, the Second Department reversed the judgment. The Court noted that “the contract [at issue] did not provide for the recovery of attorneys’ fees that resulted from the instant litigation.”[15] The Court further noted that “plaintiff failed to establish that a statute or court rule … entitle[d] her to an award of attorneys’ fees.”[16] “Accordingly,” the Court concluded that “the Supreme Court erred in granting that branch of the plaintiff’s motion which was for an award of attorneys’ fees.”[17]

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] Sage Sys., Inc. v. Liss, 39 N.Y.3d 27, 30-31 (2022) (quoting Alyeska Pipeline Service Co. v. Wilderness Soc’y, 421 U.S. 240, 251 (1975)). This Blog examined Sage, here.

[2] Id. at 30-31(quoting Hooper Assoc. v. AGS Computers, 74 NY2d 487, 491 (1989)).

[3] Id. (quoting Matter of A.G. Ship Maintenance Corp. v. Lezak, 69 N.Y.2d 1, 5 (1986)).

[4] Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 22 (1979) (citations omitted).

[5] Sage, 39 N.Y.3d at 31.

[6] Id. (citing Hooper, 74 N.Y.2d at 492).

[7] Hooper, 74 N.Y.2d at 490.

[8] Id. at 491.

[9] Id.

[10] Id. at 492.

[11] Id.

[12] Id.

[13] Id.

[14] Defendant’s argument comes from its brief on appeal.

[15] Slip Op. at *2.

[16] Id.

[17] Id. (citing, among other cases, Hooper, 74 N.Y.2d at 492).