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November 20, 2012

Attorneys' Fees And Indemnification In New York: How Covered Are You Really?

Common law indemnification (the right to recover the amount a court says you have to pay an injured person from the party who actually caused the injury) is fairly well known and indemnification clauses in construction contracts are an industry standard. But what happens when the other party to your contract refuses to honor the indemnification clause and you need to bring a separate law suit to enforce your right to be indemnified? Who pays the legal fees – you? The party that's covered by the indemnification clause? The other party who agreed to, or that by law is supposed to, indemnify you? You may be surprised to learn that the answer is you. You are entirely responsible for any legal fees you incur for trying to recover the money that the other party contractually agreed or is legally obligated to pay you – that is unless the indemnification clause in your contract specifically says that attorneys' fees for indemnification law suits are covered.

In Chapel v. Mitchell, New York State's highest court decided that a property owner was not entitled to collect the legal fees it incurred in a common law indemnity action against the responsible party. In that case, a worker was injured when he fell off the roof of a building. The worker sued the owner of the building and received a monetary award. The owner of the building then sued the worker's employer seeking reimbursement for the amount of the monetary award, the legal fees for the suit between it and the worker, and the legal fees for the suit between it and the employer. The court decided the owner was entitled to recover everything except for the legal fees the owner had to spend suing the employer to enforce the employer's contractual obligation to indemnify the owner for the injured worker's claim.

Similarly, in Lavorato v. Bethlehem Steel Corp., the court held that a property owner could not recover attorneys' fees for the cost of enforcing an indemnity agreement against a contractor when the contractor's employee was injured because "a litigant may not recover damages for the amounts expended in the successful prosecution of its rights."

Even though these cases were decided well over fifteen years ago, individuals and organizations still are running into legal problems because their contracts do not contain the proper language. For instance, in Gotham Partners, L.P. v. High Riv. Ltd. Partnership, the contract language with respect to the indemnification clause still fell short of the exacting requirement necessary to recover attorneys' fees in the indemnification law suit between the contracting parties. The court further explained that "[f]or an indemnification clause to serve as an attorney's 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 failure to have the proper indemnification and attorneys' fees language in contracts may cause problems for developers, architects, general contractors and subcontractors – anyone in the construction project who would rely on an indemnification provision in the case of an accident or even in the case of other exposure (such as a design defect or improper installation). Therefore it is important to insure that your contracts contain very clear language in the indemnity provision stating that the other party will pay your legal fees in the event that the party does not honor its agreement to indemnify you.

So, what language is in your contracts? Are you covered? Contact legal counsel to find out. If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Construction & Surety Practice Area.


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