Weil, Gotshal & Manges LLP
Indemnification Between Contracting Parties
(October 2000, Business & Securities Litigator)
By Richard L. Levine and S. Christian
When negotiating or litigating
the terms of a contractual indemnity governed by New York law, it is important
to recognize that indemnities are construed very strictly. Indeed,
as a general rule, indemnities will be held to cover only claims by third-parties,
not claims between the parties to the indemnity – absent express language
in the indemnity so providing. For example, in a recent case discussed
more fully below, even though the court found that the defendant was obligated
to indemnify the claimant/indemnitee for legal fees that the claimant had
incurred in defending an underlying third-party lawsuit, it held that the
claimant could not recover the fees incurred in suing to enforce the indemnity
(so-called “fees-on-fees”) because the indemnity did not expressly cover
claims between the parties to the indemnity. Drafters and litigants,
therefore, should be aware that courts applying New York law will not find
that an indemnity covers claims between the parties to the indemnity, including
costs incurred in enforcing the indemnity, unless the indemnity expressly
and unambiguously covers such claims and/or costs.
Indemnities Generally Cover Only Third-Party Claims
In the seminal case of Hooper Assocs.,
Ltd. v. AGS Computers, Inc.,1 the New York Court of Appeals reversed both
the trial court and the Appellate Division on the ground that, under New
York law, indemnities presumptively cover only third-party claims. In
Hooper, plaintiff sued for breach of contract, breach of express and implied
warranties, and fraud in the inducement, and sought indemnification for
legal fees incurred in prosecuting such claims. The indemnification
clause at issue obligated 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 [or] the performance of any service to be performed . .
. and the like.”2 The trial court severed the claim for indemnification
and, after trial, the jury held for the plaintiff on the remaining claims
but found that it had not suffered any damages. The trial court then
granted plaintiff’s motion for summary judgment on its claim for indemnification
of its attorneys’ fees incurred in the litigation on the grounds that
the contract “was clear and unambiguous in its terms *** in providing
for indemnification of all claims, including reasonable attorney’s fees.”3
The Appellate Division affirmed without opinion.4
The Court of Appeals, in a decision written by Judge Simons, reversed.
It held that although an indemnification clause might “seem to admit
of a larger sense,” it must be “strictly construed to avoid reading into
it a duty which the parties did not intend to be assumed.”5 Moreover,
because “a promise by one party to a contract to indemnify the other for
attorneys’ fees incurred in litigation between them is contrary to the
well-understood rule that parties are responsible for their own attorney’s
fees, the court 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.”6
The court then observed that the language of the indemnity there at issue
was “typical of those which contemplate reimbursement when the indemnitee
is required to pay damages on a third-party claim.”7 The court emphasized
that even though the indemnity covered “counsel fees arising out of breach
of warranty claims,” since a breach of warranty could result in a third-party
claim, the indemnity was susceptible to a construction that it covered
third-party claims; as a result, the indemnity was not exclusively and
unequivocally referable to claims between the parties themselves, which
was the standard for an indemnity to reach inter-party claims.8 Thus,
the court ruled that the plaintiff could not recover the counsel fees incurred
in its action against the indemnitor.
Decisions Construing Hooper
What contractual language satisfies
the Hooper standard that an indemnity must exclusively and unequivocally
refer to inter-party claims to cover such claims has been addressed in
a number of decisions.
For example, Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc.,9
arose out of defendants’ alleged breach of an agreement governed by New
York law under which defendants were responsible for collecting delinquencies
on credit card accounts. The district court found that defendants
had failed to remit monies collected for plaintiff and had destroyed records
evidencing such collections and awarded damages.10 The district court
also awarded plaintiff the full amount of its attorneys’ fees incurred
in prosecuting the lawsuit.11
On appeal, the Second Circuit reversed the award of counsel fees, finding
that even though the indemnity covered “‘all claims, demands or causes
of action, any and all costs or expenses, including attorney fees, that
may be asserted due or arising out of the [defendant’s] collection activity’
. . . [t]his language is not an unmistakably clear statement that such
damages were intended.”12 Rather, because the language “may easily
be read as limited to third party actions,” under Hooper it did not cover
Similarly, in Bonnie & Co.
Fashions, Inc. v. Bankers Trust Co.,14 the indemnity covered “‘[a]ll
costs and expenses incurred by [Bankers Trust] in protecting, maintaining,
preserving or enforcing’ [its] rights and interests acquired under the
Factoring Agreement.” The court held that because such language
could “easily be read to protect [Bankers Trust] from claims to its rights
and interests by third parties,” the language was not “exclusively or
unequivocally referable to claims between the parties themselves” and
thus the indemnity only covered third party claims.15 Bankers Trust
then moved to reargue, relying on a separate clause in the indemnity which
provided for the indemnification of its expenses incurred “defending or
prosecuting any actions or proceedings out of or in any way related to
[the Factoring] Agreement.”16 The court held that even this broad
language “cannot be read as an expression of the parties’ unmistakably
clear intention that plaintiffs would pay for [Bankers Trust’s] litigation
costs arising from litigation between the parties.”17 The court
reasoned that “at least as plausible an interpretation . . . is that plaintiffs
agreed to indemnify [Bankers Trust] for its costs in prosecuting or defending
actions related to the Factoring Agreement against third parties.”18 Therefore,
“[b]ecause both of these interpretations are possible, [Bankers Trust’s]
reading cannot be as ‘unmistakably clear’ as it must be to render plaintiffs
liable for all of [Bankers Trust’s] litigation expenses in this action.”19
In Bourne Co. v. MPL Communications, Inc.,20 the dispute involved competing
claims between a publisher and a composer to ownership interests arising
from the extended renewal term in the copyright of a musical composition.
The court held that because “[t]he Agreement at issue requires indemnification
of plaintiff when plaintiff must take steps to protect its right, title
and interest in the composition and allows plaintiff to ‘dispose of any
matter, claim, action or proceeding’” (emphasis supplied), the language
of the indemnity, “as in Hooper, is typical of the type which contemplates
indemnification for third-party claims.”21 The court rejected plaintiff’s
argument that the indemnity, which explicitly referenced claims arising
from breaches of covenants, warranties or representations in the contract,
could to such extent only be referring to claims between the parties.22
The court observed that the indemnity in Hooper also contained such
language and that Hooper nevertheless concluded that “none of these subjects
are exclusively or unequivocally referable to claims between the parties
themselves or support an inference that defendant promised to indemnify
plaintiff for counsel fees in an action on the contract.”23
The decision in Promuto v. Waste Management, Inc.,24 however, was that
the indemnity did cover claims between the parties to the indemnity. Promuto
involved a claim for breach of warranty in connection with the sale of
a family business. The court granted plaintiffs’ motion for summary
judgment on liability, finding that defendants had breached express warranties.25
The court also granted plaintiffs’ motion for summary judgment on
its entitlement to indemnification; the court ruled that there was indemnification
for inter-party claims because the indemnity contained two clauses and
the second clause repeated the language of the first but added language
apparently referring to claims between the contracting parties.26 The
court held that the presence of this second clause made it clear that there
was indemnification for inter-party claims because otherwise the first
clause would have had no purpose.27
Finally, given Hooper’s holding
that the intent to cover inter-party claims must be exclusive, unambiguous,
and unmistakable, several courts have looked to whether an indemnity which
arguably is referencing inter-party claims could have included additional
language which would have made such intent even more clear. For example,
in Frater v. Tigerpack Capital, Ltd.,28 plaintiff sought indemnification
from defendant for his fees incurred in prosecuting a wrongful termination
claim. Plaintiff based his claim for indemnification on the indemnities
in his Employment Agreement, a separate Shareholders’ Agreement, and the
company’s by-laws. The court found that the indemnification clauses
applied only to actions brought by third-parties because of “[t]he strong
presumption against reading into a contract a condition which could easily
have been explicitly included.”29
Rules Of Contract Construction Apply
Courts have relied on traditional
rules of contract construction when determining whether an indemnity covers
inter-party claims under the stringent Hooper standards. In Hooper
itself, the Court of Appeals referenced the hoary principles that “[w]ords
in a contract are to be construed to achieve the apparent purpose of the
parties” and the need to “afford[ ] a fair meaning to all of the language
employed by the parties in the contract and [to adopt a construction that]
leaves no provisions without force and effect.” The court then concluded
that because the notice and opportunity to defend provisions in the indemnity
required plaintiff to “promptly notify” defendant of “any claim or litigation
to which the indemnity . . . shall apply” (emphasis supplied) and provided
that defendant “may assume the defense of any such claim or litigation
with counsel satisfactory to [plaintiff]” (emphasis supplied), the indemnity
covered only third-party claims in that such provisions could have “no
logical application to a suit between the parties.”30
A similar analysis was applied in Sequa Corp. v. Gelmin.31 There,
co-plaintiff Sequa Capital Corp (“SCC”) and defendants Gelmin and GBJ
Corporation (“GBJ”) had entered into both a consulting agreement, whereby
defendants agreed to perform services for SCC, and an indemnity agreement,
pursuant to which SCC “[i]ndemnified GBJ and Gelmin against ‘claims’
of any kind and nature, including reasonable legal fees and expenses that
might be incurred in defending against suits imposed on, incurred by, or
asserted against GBJ or Gelmin due to the performance of their duties under
the Consulting Agreement.”32
SCC and its parent Sequa Corp. later sued defendants for violations of
the Racketeer Influenced and Corrupt Organizations Act (“RICO”). Defendants
counterclaimed, alleging that even if they were held liable to plaintiffs,
plaintiffs must indemnify them and reimburse their reasonable legal expenses
pursuant to the indemnity. In its decision, the court first examined
the language of the indemnity, finding that “the agreement’s broad language
– ‘any and all’ claims ‘of any kind and nature’ – refers solely to
the type of claims that are covered, not the identification of parties
who may assert those claims.”33 The court then held that the indemnity
did not cover actions between the contracting parties because the provisions
setting forth procedures for notification of all claims and the right of
the indemnitor to assume the defense of all claims could have no logical
application to a suit between the parties. Moreover, the indemnification
agreement contained a clause which provided that SCC “shall be subrogated
to the rights of GBJ and Gelmin whenever SCC pays any amount pursuant to
the Agreement.” The Sequa court emphasized that this clause could
not be applied to claims asserted by plaintiffs against the defendants.
Interestingly, the rule of contract construction that a court should not
interpret a contract so as to leave any provision of the contract without
force and effect was central to a pre-Hooper decision which the Hooper
court took great care to distinguish. In Breed, Abbott & Morgan
v. Hulko,34 the Breed, Abbott law firm had acted as an escrow agent for
defendant Hulko in connection with his contract to purchase a house. Under
the terms of the escrow agreement, Breed, Abbott was obligated to deliver
the down payment to the sellers in the event of a default by Hulko. When
Hulko defaulted, Breed, Abbott duly delivered the down payment. Hulko
then sued the firm for wrongfully releasing the escrow fund to the sellers.
A trial on the merits resulted in a judgment for the firm.
Breed, Abbott then sued Hulko for indemnification of its legal fees incurred
in defending Hulko’s failed claim. That indemnity in the escrow
agreement (as quoted in the First Department’s decision under appeal to
the Court of Appeals) provided that “the parties hereby indemnify the
escrowee and hold the escrowee harmless from any claims, damages, losses
or expenses arising in connection herewith.”35 The trial court dismissed
Breed, Abbott’s claim for its legal fees; the First Department, however,
reversed and the Court of Appeals affirmed. The Court of Appeals
reasoned that if the broadly phrased indemnity did not include “legal
expenses incurred [by the escrowee] in defending against an action by one
of the parties alleging misconduct by the escrowee which resulted in a
determination in favor of the escrowee, it is difficult, if not impossible,
to ascertain for what it was that the parties had agreed to indemnify the
Hooper distinguished Breed, Abbott
on the grounds that in Breed, Abbott, the “intent of the parties [to cover
inter-party claims] was manifest,” while in Hooper, “the potential existed
for third-party actions seeking lost profits, personal injury or property
damages from plaintiff,” so an intent to cover claims between the parties
could not be assumed.37
In a post-Hooper case finding that an indemnification provision did cover
claims between the contracting parties, Sagittarius Broad. Corp. v. Evergreen
Media Corp.,38 the First Department relied on the same rule of contract
interpretation. The court determined that, as in the Promuto case
discussed above, the indemnification provision must be read to apply to
actions between the parties because otherwise a different subsection of
the indemnity “which clearly pertains to third-party actions” would be
rendered “mere surplusage.”39
In Re Health Management Systems
As noted in the introduction, a
recent decision demonstrated the continuing viability of the Hooper rule.
In In re Health Management Sys., Inc. Sec. Litig.,40 the court followed
certain earlier precedent and held that the claimant/indemnitee was not
entitled to recover the costs it had incurred in suing to enforce the indemnity,
even though it held the claimant was entitled to indemnification for the
underlying third-party claim. Health Management involved a dispute
over whether § 722(a) of the New York Business Corporation Law (the “BCL”)
and/or the indemnification provisions of the by-laws of Health Management
Systems, Inc. (“HMS”) required HMS to indemnify the claimant, a director
of the corporation, for costs he incurred in defending himself in a third-partysecurities class action and for the attorneys’ fees he incurred in trying
to enforce the indemnity. The facts of the case are fairly simple.
While the claimant had been named as a defendant in the underlying
class action in his capacity as a director of HMS, the class action plaintiffs
ultimately stipulated to his dismissal. HMS, however, refused to
reimburse him for his attorneys’ fees and expenses, claiming that such
fees were excessive and thus neither reasonable nor necessarily incurred
– preconditions for indemnification under the company’s by-laws. The
claimant then filed a motion for an order requiring HMS to indemnify him
for his defense costs.
The court referred the motion to a Magistrate Judge, who issued a Report
and Recommendation that HMS be required to indemnify the claimant for $67,636.73
in attorneys’ fees and expenses incurred in defending the class action
but disallowing the $17,147.64 sought for costs incurred in enforcing the
indemnity. In so ruling, the Magistrate Judge declined to follow
Sierra Rutile Ltd. v. Katz,41 and Professional Ins. Co. of New York v.
Barry,42 both of which granted the movant costs incurred in enforcing an
indemnity. The Magistrate Judge observed that the Sierra Rutile decision
contained no analysis of the issue and the Barry court’s conclusion that
“fees on fees” were “necessary” in connection with the defense of the
underlying action was a “strained interpretation of the B.C.L. [which]
has not been adopted by any other court and is inconsistent with the New
York rule that an attempt to shift fees must be clearly stated.”43 The
Magistrate Judge noted that while “it is unfair for someone promised complete
indemnification to have to incur substantial costs to secure that right,
. . . [f]ees on fees ‘are not a part of defending the indemnified claim,
but instead fall within the ordinary rule that each party bears its own
The Magistrate Judge’s recommendation in Health Management was adopted
by the district court. The court began by noting that the general
rule is that parties are responsible for their own attorney’s fees and
that under Hooper, courts considering an indemnity 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.” Id.
at 230 (quoting Hooper). The district court then noted its agreement
with the Magistrate Judge “that there may be an element of illogic in
denying fees on fees. After all, the purpose of indemnity is to make
someone whole.”45 The district court, however, also agreed with
the Magistrate Judge that there was no “unmistakably clear” language
in the BCL or HMS’s by-laws to support an award of fees on fees, concluding
that in light of existing precedents, “the appropriate resolution of this
problem is to amend the applicable instrument, be it a contract or a corporate
by-law, explicitly to authorize fees on fees, rather than to conclude that
language which is ambiguous is, actually, ‘unmistakably clear.’”46
This review of the case law leads
to one very obvious conclusion: when drafting or negotiating an indemnity,
the question of whether it is to cover claims between the parties, or at
least fees-on-fees, needs to be addressed directly. Mere broad verbiage
– such as language that the indemnity is to apply to “any and all actions
arising out of the contract” – will not be construed as sufficient to
cover claims between the parties. Indeed, if the parties intend to
provide for indemnification for inter-party claims and for claims brought
by third parties, the prudent practice is to include distinct clauses with
express language spelling out the circumstances under which each indemnity
is to apply. Further, it is important that any notice and opportunity
to defend provision be tailored to reflect the intent of the parties with
regard to inter-party claims. In the case of indemnification of officers
and directors, since they no longer can rely on the BCL for protection,
the intent to provide for fees on fees must be expressly stated in the
company’s by-laws or in a separate indemnification agreement.
N.Y.2d 487, 548 N.E.2d 903, 549 N.Y.S.2d 365 (1989).
2. Id. at 492, 548 N.E.2d at 905, 549
N.Y.S.2d at 367.
3. Id. at 490, 548 N.E.2d at 904, 549
N.Y.S.2d at 366.
5. Id. at 491, 548 N.E.2d at 905, 549
N.Y.S.2d at 367.
6. Id. at 492, 548 N.E.2d at 905, 549
N.Y.S.2d at 367 (emphasis supplied).
9. 98 F.3d 13 (2d Cir. 1996).
10. Id. at 17.
12. Id. at 21.
14. 955 F. Supp. 203, 217-19 (S.D.N.Y.
16. Bonnie Co. Fashions, Inc. v. Bankers
Trust Co., 171 F.R.D. 79, 84 (S.D.N.Y. 1997).
20,. 751 F. Supp. 55 (S.D.N.Y. 1990).
21. Id. at 57.
23. Id. (citing Hooper).
24. 44 F. Supp. 2d 628 (S.D.N.Y. 1999).
25. Id. at 650.
26. See id. at 650-51.
27. Id. at 652.
28. 1998 WL 851591, *3 (S.D.N.Y. Dec.
29. See generally Szalkowski v. Asbestospray
Corp., 259 A.D.2d 867, 686 N.Y.S.2d 243 (3d Dep’t 1999) (indemnity did
not cover third party claim which was the result of claimants’ own negligence,
in part because the drafter “had the expertise to include language therein
to insure protection from its own negligence . . . [and] failed to do so”).
N.Y.2d at 491-93, 548 N.E.2d at 905, 549 N.Y.S.2d at 367. The court
Promuto v. Waste Management, Inc., discussed above, distinguished the notice
and opportunity to defend provision there from the one at issue in Hooper
on the basis that the provision in Promuto expressly limited its application
to third-party claims: “(b) In the event that any third party asserts
a claim against any [Seller Indemnitee] which may result in a claim for
indemnification against the Purchaser, then such Seller Indemnitee shall
promptly give written notice to the Purchaser of such claim.” 44
F. Supp.2d at 651 (emphasis added). The Promuto court held that such
language “evinces a clear intent to distinguish between inter-party claims
and third-party claims, with the notice and assumption of defense provisions
applying exclusively to the latter.” Id.
31. 851 F. Supp. 106, 111 (S.D.N.Y.
32. Id. at 108.
33. Id. at 110.
34. 74 N.Y.2d 686, 541 N.E.2d 402, 543
N.Y.S.2d 373 (1989).
35. Breed, Abbott & Morgan v. Hulko,
139 A.D.2d 71, 72, 531 N.Y.S.2d 240, 241 (1st Dep’t 1988) (affirmed by
the case cited immediately above).
Abbott, 74 N.Y.2d at 687, 541 N.E.2d at 403, 543 N.Y.S.2d at 374 (quoting
the First Department).
37. 74 N.Y.2d at 493-94, 548 N.E.2d
at 906, 549 N.Y.S.2d at 368.
38. 293 A.D.2d 325, 663 N.Y.S.2d 160
(1st Dep’t 1997).
39. 243 A.D.2d at 326, 663 N.Y.S.2d
40. 82 F. Supp. 2d 227 (S.D.N.Y. 2000).
41. 1997 WL 431119 (S.D.N.Y. July 31,
42. 60 Misc. 2d 424, 303 N.Y.S.2d 556
(Sup. Ct. N.Y. Cty.), aff’d, 32 A.D.2d 898, 302 N.Y.S.2d 722 (1st Dep’t
43. Health Management Sys., 82 F. Supp.2d at 236 (citing Hooper and its progeny); see also id. (Sierra Rutile
and Barry “cannot be reconciled with the general rule in New York that
attorneys’ fees may not be awarded unless there is specific statutory
or contractual authorization”). A line of Delaware cases interpreting
Delaware General Corporation Law § 145, the directors and officers indemnification
provisions, has concluded that the language therein also is not specific
enough to allow for “fees on fees.” See, e.g., MCI Telecomm. Corp.
v. Wanzer, 1990 WL 91100 (Del. Super. Ct. June 19, 1990) (acknowledging
that the court in Barry allowed for fees on fees under the New York BCL,
but holding that the Delaware statute did not permit such fees and “refus[ing]
to depart from the general ‘American’ rule that each party to a litigation
will be responsible for the costs associated with bringing claims in the
absence of specific statutory authorization for such costs”); Cochran
v. Stifel Fin. Corp., 2000 WL 28672
2 (Del. Ch. Mar. 8, 2000) (holding
that neither §145 nor the company’s by-laws allow for fees on fees). Indeed,
in Mayer v. Executive Telecard, Ltd., 705 A.2d 220 (Del. Ch. 1997), another
decision construing §145 as not providing for fees on fees, the court reasoned
that ‘[t]he [Delaware] Legislature could also have included language explicitly
granting a successful claimants ‘fees for fees,’ as other states have
done in their statutes,” and cited as examples Ga. Code Ann. §14-2-854(b)
(1996); Ind. Code Ann. §23-1-37-11 (Burns 1996); and Model Business Corp.
Act §8.54(b) (1993). See also Davis & Cox v. Summa Corp., 751
F.2d 1507, 1528 (9th Cir. 1985) (applying Delaware law and affirming denial
of fees on fees because “[t]he Delaware statute, unlike the California
statute, does not provide for the recovery of attorneys’ fees and expenses
incurred in establishing an indemnity claim”).
44. Id. (citing Thyssen, Inc. v. S/S
Eurounity, 21 F.3d 533, 541 (2d Cir. 1994)). But see Fleisher v.
Fed. Deposit Ins. Corp., 70 F. Supp. 2d 1238, 1242 (D. Kan. 1999) (construing
language in Kansas corporate indemnification statute and company’s by-laws
indemnifying for fees “actually and reasonably incurred by such person
in connection” with the defense of the underlying action to include fees
at 231. Similar logic was applied by the Delaware Supreme Court to
award fees on fees in Pike Creek Chiropractic Center, P.A. v. Robinson,
D.C., 637 A.2d 418, 422-23 (Del. 1994). Overruling the trial court,
the Supreme Court construed an indemnification clause in an employment
contract – which required defendant to hold harmless and indemnify plaintiff
against “any liabilities and expenses, including attorney’s fees” resulting
from plaintiff’s acts or omissions — to provide for fees on fees “because
[plaintiff] will not be held harmless from [defendant’s] acts or omissions
unless it receives all legal expenses and attorneys’ fees it has incurred,
including those incurred in enforcing the Indemnification Clause.” Id.;
but see Jackson v. Turnbull, No. 13042, at 10 (Del. Ch. May 22, 1995) (“The
argument that the director would not be made whole if that director were
required to pay the costs of this motion out of his own pocket has a certain
appeal;” however, this argument “has appeal in every case in
which a plaintiff has to
go to court in order to vindicate a right, even a clear right, whether
it’s a right that arises under the corporation law, contract law or tort