When indemnity is mentioned, most owners, designers and contractors think of protection from third party claims asserted by parties with whom they have no contractual privity. However, depending on the language used, indemnity provisions also can cover first party claims asserted by parties in privity of contract. To the surprise of many, such clauses may cover actions for breach of contract in addition to claims for negligence.
Most states follow the common law "American Rule" which provides that a prevailing party generally must bear its own attorneys’ fees. An exception in many states is the ability of an indemnitee to recover attorneys' fees incurred in defending against a third party claim. Another exception to the American Rule under which a prevailing party may be awarded attorneys' fees is when the parties have a contractual agreement to that effect. Increasingly, courts are looking to indemnity clauses in deciding whether the parties have agreed that attorneys' fees will be recoverable in first-party actions. Recent decisions from the Courts of Appeals of Maryland and the District of Columbia have given broad interpretation to indemnity provisions, allowing the recovery of attorneys' fees in first-party breach of contract actions (much to the surprise and displeasure of the indemnitors who have argued that only third party claims were intended to be covered by the indemnity provisions). Another important consideration, especially for designers, is that reimbursement of an adversary's attorneys' fees may not be insurable under a standard errors and omissions policy.
In short, regardless of how carefully you may have considered the pros and cons of including a prevailing party clause in your contract, the indemnity clause you have negotiated may unwittingly permit recovery of attorneys' fees for first and third party claims - even if the clause makes no mention whatsoever of attorneys' fees. To avoid unintended consequences, be sure to pay particularly close attention to the language of the indemnity provisions in your contracts.
See attached article co-authored by partner Garry Boehlert discussing this topic in more detail.