NEW YORK COURT OF APPEALS REAFFIRMS THAT, WITH RESPECT TO SHIFTING OF RESPONSIBILITY FOR PAYMENT OF ATTORNEY’S FEES, THE AMERICAN RULE RULES

• Posted on: Oct 21 2022

By Jonathan H. Freiberger

As discussed previously in this Blog [here], the first question asked by a potential client when consulting about a new litigation matter is “can we sue them for our legal fees.”  Clients are often dismayed to learn that attorney’s fees are not generally recoverable in litigation under the “American Rule,” because “[i]n the United States, the prevailing litigant is ordinarily not entitled to collect a reasonable attorney fee from the loser.”  Alyeska Pipeline Services Co. v. Wilderness Society, 421 U.S. 240, 247 (1975) (providing a historical perspective on the awarding of attorneys’ fees in Federal Court litigation); see also, Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 21-22 (1979).  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.”  Mighty Midgets, 47 N.Y.2d at 22 (citations omitted). 

On October 20, 2022, the New York Court of Appeals, in Sage Systems, Inc. v. Liss, reaffirmed the strength of the principles behind the “American Rule” regarding shifting of attorney’s fees in litigation.  The parties in Sage Systems were partners in a real estate matter and their partnership agreement provided, inter alia: 

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.

Decades after the entering into the partnership, defendant brought an unsuccessful dissolution proceeding.  Thereafter, plaintiff commenced the underlying action seeking to collect from defendant the attorney’s fees and costs expended in defending the dissolution proceeding.  Supreme court granted plaintiff’s motion for summary judgment and denied defendant’s cross-motion for summary (in which defendant argued that “the partnership agreement did not provide for attorney’s fees and did not apply to actions between the partners”).  In so doing, supreme court agreed with plaintiff that the broad indemnification clause in the partnership agreement covered legal fees.  Supreme court’s order was affirmed by the Appellate Division and the Court of Appeals granted leave to appeal.

Plaintiff argued that “the indemnification provision’s broad, unrestrictive language demonstrates the parties’ clear intent to provide attorney’s fees related to direct claims between them”, but the Court of Appeals disagreed.  The Court of Appeals explained:

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 was originally derived from federal legislation passed in 1853 which recognized that losing litigants were being unfairly saddled with exorbitant fees.  [Citations and internal quotation marks omitted.]

While the Court recognized that the American Rule is “straightforward”, it also recognized that “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.”  (Citating cases.)  The Court, however, criticized those cases that “presume that broadly worded indemnification provisions … are intended to cover attorney’s fees” because “they deviate from this Court’s exacting standard that the agreement must contain ‘unmistakably clear’ language of the parties’ intent to encompass such actions.”  (Citing Hooper Assoc. v. AGS Computers, 74 N.Y.2d 487, 492 (1989).)

The subject indemnification provision, the Court noted, makes no mention of the recoupment of attorney’s fees.  Indeed, the Court found that “nothing in the provision nor the agreement as a whole makes ‘unmistakably clear’ that the partners intended to permit recovery for attorney’s fees in an action between them on the contract.” (Citing Hooper, 74 N.Y.2d at 487.)  Finally, the Court advised that:

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.

Jonathan H. Freiberger 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.