Under the so-called “American Rule,” a party that prevails in litigation typically is not entitled to recover the costs, expenses and legal fees it has to expend to secure a judgment in its favor. As such, many business contracts include a “fee-shifting” provision, requiring a defendant to reimburse a prevailing plaintiff for the reasonable legal fees it incurs to obtain a judgment in its favor – and courts routinely enforce such provisions. Sometimes, a fee-shifting provision is part of a much broader indemnification agreement. While doing so is perfectly appropriate, care needs to be taken in expressing the fee-shifting obligation, or it may not be enforceable. Indeed, that is precisely the unfortunate position in which the plaintiff found itself in Harris v. Imaging Advantage, LLC.
Five years ago, the plaintiffs in Harris initiated their suit against Imaging Advantage in the Business Litigation Session of the Superior Court. In December of 2021, the plaintiffs were awarded summary judgment on two different contract claims, the first of which related to a License and Services Agreement. According to Section 15.1 of the LSA:
Each Party … agree[d] to defend, indemnify and hold harmless the other Party … from and against any and all claims, suits losses, damages, costs, fees, expenses (including reasonable attorneys’ fees and expenses of litigation) … to the extent based on or arising out of … any breach of any representation, warranty or covenant or other provision of this Agreement ….
Thus, the plaintiffs also sought to be awarded the legal fees they incurred in order to obtain summary judgment. In addressing the matter, Judge Krupp noted that for a fee-shifting provision to be enforceable, it must be unambiguous. He then went on to note that notwithstanding the clarity of the language set forth above:
- Section 15 was entitled “Indemnification; Insurance.”
- The LSA used language such as “defend, indemnify and hold harmless,” or “indemnify, defend and hold harmless,” which are phrases associated with third-party indemnification, and not with fee-shifting between parties.
- The second half of Section 15.1 required notice to be given in order for a party to perfect its right of indemnification.
- Section 15 also allowed for the indemnifying party to control the defense but allow the indemnity to select counsel of its own choosing.
Taken as a whole, Judge Krupp found that these factors made it far from unambiguous that the indemnification of legal fees was intended to apply to a contract dispute, as opposed to the legal fees one might incur if a third-party filed a claim. Accordingly, he denied the request for legal fees.
The takeaway from Harris with respect to the drafting of a fee-shifting provision is pretty straight-forward: if you want a prevailing party to be able to recover its legal fees for a breach of contract (or tortious conduct) by any other contracting party, state that in plain unambiguous terms. Failing to do so could put at risk a prevailing your right to be compensated for the expenses of obtaining a judgment.