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Recovering Attorney's Fees Incurred in Indemnification Disputes Between Parties

Indemnification disputes between parties to litigation might be thought of as “the fight within the fight,” and arise when parties disagree as to whether the claim or claims at issue in the underlying litigation fall within the auspices of the indemnification provision of the parties’ contract. Such disputes may also raise the question of which party, the potential indemnitor or potential indemnitee, should pick up the potential indemnitee’s attorney’s fees incurred in resolving the issue.  The Massachusetts appellate courts have not yet answered this question.

The general rule is that indemnification clauses do not cover attorney’s fees incurred in establishing the right to indemnification.  One Massachusetts Superior Court followed this approach.  Petit v. Basf Corp., 2001 WL 410358 (Mass.Super., Apr. 20, 2001).  But, at least one First Circuit decision applying Massachusetts law, suggests that courts in the Commonwealth might find that attorney’s fees incurred in the course of inter se litigation are covered, in certain situations.  Caldwell Tanks v. Haley & Ward, 471 F.3d 210 (1st Cir., 2006).

At first glance, the decisions in Petit and Caldwell may appear inconsistent as similar indemnification provisions were at issue. Yet, when read together against the backdrop of well-established Massachusetts law on contracts and indemnification, they provide a useful compass for how other Massachusetts courts might address the issue under the circumstances presented.  They also provide guidance as to how to draft indemnification clauses to guard against this potential dispute.

In Petit, a subcontractor slipped and fell at a construction site.  The subcontractor sued the owner, who then filed cross-claims against the general contractor and others.  After settling the claims with the subcontractor, the owner sought to recover its fees and costs against the general contractor, citing the indemnity agreement in their contract. In that indemnity agreement, the general contractor agreed to hold the owner harmless from and against: "[A]ny and all liability, damage, loss, cost, expense (including attorney’s fees), claim, demand, suit, action, judgment or recovery for or on account of any damage or releases to the environment, bodily injury or death of persons or damage to property . . . on or in connection with any negligent acts or omissions of [the general contractor] arising out of the performance or non-performance by [the general contractor] of its duties hereunder."

At summary judgment, the Court ruled that because the indemnity provision did not specifically state that the contractor was obligated to pay attorney’s fees and expenses incurred by the owner in actions against the general contractor the owner was not entitled to recover those fees.  The Court noted that it was “persuaded by the principle that, in cases where the contestants have engaged in litigation with each other, an obligation upon one to indemnify the other for fees and costs should result only where the indemnity provision specifically expresses the intent of the parties to provide for costs thus incurred.” 

In Caldwell, five years later, the First Circuit held that a similar indemnity provision did obligate the indemnitor to cover attorney’s fees incurred by the indemnitee in prosecuting a claim for indemnification.  In that case, a general contractor and builder of a water tank, instituted an action against an engineer for negligent misrepresentation.  The engineer asserted a counterclaim for indemnification of its defense costs among other things.  A jury ruled against the general contractor in the underlying action and awarded attorney’s fees to the engineer based on the indemnification clause.  The parties appealed and the First Circuit upheld the award.  The court concluded that the indemnification clause at issue explicitly contemplated litigation costs associated with disputes between the contracting parties, and that under the circumstances, such costs could be recovered under Massachusetts law.  

The indemnification clause at issue read in part: "The Contractor will indemnify and hold harmless the owner and the engineer and their agents and employees from and against all claims, damages, losses and expenses including attorney’s fees arising out of or resulting from the performance of the work."

The First Circuit noted that well-established Massachusetts law requires that indemnification provisions be construed in accordance with their ordinary and plain meaning, and without bias in favor if the indemnitor or against the indemntitee.  The court acknowledged the Commonwealth’s adoption of “American Rule,” which provides that attorney’s fees are not ordinarily recoverable in the absence of statute, or court rule, but noted that that parties may alter the rule by contract.  The court also reasoned that Massachusetts has not adopted a special rule limiting the application of indemnity provisions to disputes with third-parties when the provision is silent as to the award of legal fees incurred in the course disputes between parties themselves.  According to the First Circuit, the above language reflected the parties’ intent that all of the engineer’s costs and fees, including costs and fees associated with disputes between the parties, should be paid by the general contractor.  

There are a few distinctions between the circumstances in Caldwelland Petit.  As the First Circuit in Caldwell itself recognized, the roles of the parties were reversed.  In Petit, the indemnitee sought reimbursement from the indemnitor for attorney’s fees the indemnitee incurred in affirmatively prosecuting claims against the indemnitor.  In Caldwell, the indemnitee sought reimbursement from the indemnitor in defending itself against a misrepresentation claim brought against it by the indemnitor (for which it was ultimately found not to be liable), while asserting its right to indemnification for that same claim. In acknowledging this distinction, the First Circuit found that in situations like that exemplified in Petit, “the indemnitor has strong arguments that it should not be required to reimburse attorney’s fees, over which it had no control, for suits against it by an indemnitee.”  While arguably the indemnitee in the case before the Caldewell court was also prosecuting a case against the indemnitor for indemnification, the court also found that in that circumstance the indemnitee’s defense to the indemnitor’s claim and its proof of its counterclaim were co-extensive.

So where does this lack of clear guidance leave parties contemplating the contours of a contractual indemnification provision?  While it is likely that Massachusetts courts will follow the general rule and be hesitant to award attorney’s fees incurred in the course of litigation between parties over the duty to indemnify without clear precedent firmly in place, the possibility remains and Massachusetts courts might follow the later guidance of the First Circuit.  Thus, specificity is key when drafting such clauses and the indemnification provision must clearly state the parties’ intentions.  An indemnitee wanting the provision to cover costs and fees arising out of the indemnitor’s failure to fulfill its obligations should insist on language that expressly provides for this.  An indemnitor who does not want to be held responsible for such fees and costs should expressly exclude those from the scope of the provision.  Addressing the issue during negotiations might avoid the distraction of dealing with the fight within the fight. 

Our attorneys have extensive experience drafting contracts which include indemnification language and we would be happy to discuss any questions you may have.  Please do not hesitate to contact us.