The Answer Depends on the Specific Wording of the Clause.
Various contracts, especially those involved in construction projects, contain indemnity provisions by which one party (the indemnitor) agrees to reimburse another party (the indemnitee) for damages, costs and expenses associated with species of claims covered by the express language in the indemnity agreement. Although normally the indemnitee is entitled to reimbursement of fees incurred in defending against claims by third parties in most indemnity clauses, the question arises as to whether indemnitee is entitled to an attorney’s fees award for establishing its rights to indemnity from the indemnitor. The answer in California is, as we shall see, dependent on the wording and breadth of the indemnity clause itself.
Generally, there is a presumption that an indemnitee is entitled to recover, as a part of damages, reasonable attorney’s fees expended as a result of third-party suits which are encompassed within the scope of the indemnity clause. (See Peter Fabrics, Inc. v. S.S. “Hermes,” 765 F.2d 306, 316 (2d Cir. 1985) (Friendly, J.).) However, this presumption is reversed on the fee recovery issue in an indemnity prosecution lawsuit, with the general rule being that an indemnitee cannot recover its attorney’s fees incurred in establishing its indemnification rights absence express contractual language otherwise. (Ibid.) This happens to mirror how California courts have come out on the issue, as we survey below.
California litigators frequently encounter broadly worded indemnification clauses and would like to argue that they are tantamount to attorney’s fee clauses allowing recovery to the prevailing party. Probably the most oft-cited case to recognize that standard indemnification clauses will not confer fee recovery, without more precise entitlement language, is Myers Building Industries, Ltd. v. Interface Technology, Inc., 13 Cal.App.4th 949 (1993).
Myers involved a general contractor which won a $350,000 attorney’s fees award based on various indemnification provisions in integrated construction documents. Although contractor agreed to indemnify owner (the indemnitee) for various claims (mainly third-party claims) in the pertinent clauses, nothing in the documents established that owner would face fee recovery exposure to contractor—especially conspicuous was the absent of a fees clause in the construction contract itself. In reversing the fee award in contractor’s favor, then Justice Grignon wrote: “The very essence of an indemnity agreement is that one party holds the other harmless from losses resulting from certain specified circumstances. The provisions of Civil Code section 1717 were never intended to inflict upon the indemnitee the obligation to indemnify his indemnitor in similar circumstances. Indemnification agreements are intended to be unilateral agreements. The Legislature has indicated no intent to make them reciprocal by operation of law. Indeed a contrary intent is evidence by Civil Code section 2778, subdivision 3, including attorney fees as a matter of law as an item of recoverable loss in an indemnity agreement.” (Myers, supra, 13 Cal.App.4th at 973.)
Myers, which follows the general rule that fees incurred in prosecuting indemnification rights are not recoverable, has been followed in subsequent appellate decisions. (See, e.g., Campbell v. Scripps Bank, 78 Cal.App.4th 1328, 1337-1338 (2000) [escrow agreement provision; clause did not provide for the recovery of attorney fees in actions between a principal and the escrow holder to enforce the general escrow instructions, but was only a standard indemnity provision]; M. Perez Company v. Base Camp Condominiums Assn. No. One, 111 Cal.App.4th 456, 463 (2003) [standard indemnity clause in owner-contractor construction agreement “is not a prevailing-party-attorney-fee provision within the meaning of Civil Code section 1717, but an enumeration of the scope of the indemnity,” citing Campbell].)
However, the exception to the general rule—where express language provides otherwise in a standard indemnity clause—was the focus of attention in Baldwin Builders v. Coast Plastering Corp., 125 Cal.App.4th 1339 (2005). There, in a standard indemnity clause between a developer and subcontractors, there was ending language that stated “Subcontractor shall pay all costs, including attorney’s fees, incurred in enforcing this indemnity agreement.” What a difference a sentence can make. After surveying prior jurisprudence, the Baldwin Builders court—the same one deciding Campbell—determined this additional express language “authorizes the recovery of attorney fees where one of the parties to the agreement brings an action to enforce the indemnity; such an action is one ‘on [the] contract’ within the meaning of section 1717(a) and thus the attorney fees clauses are subject to the statutory requirement of reciprocity.” (Id. at 1346.) In fact, Baldwin Builders disagreed with dicta in Perez, if tenable, that would have refused to interpret the express language as a fees clause enforceable under section 1717. (Ibid.)
The upshot on interpretation of indemnification clauses is to carefully read the language and determine if there is “plus” fee recovery language beyond standard indemnity verbiage. Baldwin Builders is must reading as a compass for determining what verbiage might give rise to fee recovery under section 1717.
For an excellent article on the assessment of fee recovery situations in contractual indemnity actions, see Johnstone & Yeilding, “The Recovery of Attorney’s Fees In Contractual Indemnity Suits,” The Update, Vol. 8, Issue 5 (Spring 2005), pp. 3-4, 20-21, published by San Diego Defense Lawyers (and previously published in FOR THE DEFENSE, December 2004, Vol. 46, No. 12).