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The undefined phrase “legal costs” as used in bond agreements guaranteeing the completion of naval projects in Brazil has led the 2nd U.S. Circuit Court of Appeals to vacate a $36.7 million award of attorney fees to the prevailing party. Finding no compelling argument for an exception to the American rule that prevailing parties are not generally awarded attorney fees, the court vacated the award ordered in United States Fidelity and Guaranty Co. v. Braspetro Oil Services Co., 02-9185. The ruling came following the review of Southern District of New York Judge John Koeltl’s decision, after a bench trial, that U.S. Fidelity and its fellow sureties were obligated under performance bonds to pay $370 million, an amount that included the fee award. The genesis of the litigation was the bids for two contracts for large-scale naval construction projects in Brazil in 1994 and 1995. The winning bids for the project were submitted by a consortium that was required to obtain performance bonds that would guarantee the completion of the project. By December 1996, projected cost overruns for the two projects had reached $189 million. The consortium was ultimately declared in default on the two projects in May and June 1997. The sureties filed two actions in the Southern District, one seeking a declaratory judgment that they had no liability under the bonds and a second seeking indemnification from the individual members of the consortium and from Petrobras, the owner of Braspetro. Judge Koeltl found that the sureties had failed to meet their obligations under the performance bonds by refusing to take over the projects and leaving Braspetro to try to complete the project itself. Koeltl set $174.2 million as cost-of-completion damages and also awarded the obligees $62.6 million in liquidated damages, $36.7 million in attorney fees and $96.5 million in prejudgment interest — all totaling just over $370 million. The 2nd Circuit, in an opinion by Judge Roger J. Miner, affirmed Koeltl’s finding that the default notices terminated the consortium’s rights under the contracts and also affirmed his finding that the obligees complied with all the conditions precedent to the sureties’ obligations under the bonds. But the circuit vacated the $62.5 million awarded in liquidated damages as invalid. It then turned to the issue of attorney fees. Under the American rule, Judge Miner said, attorney fees are not ordinarily recoverable absent a statute or a contract provision that expressly provides for fee awards. And while a district court, he said, has broad discretion to award fees based on a “valid contractual authorization,” that language must be “unmistakably clear.” As to the meaning of the term “legal costs” in the contracts for the performance bonds, Miner said, “Determining the correct interpretation of this term appears to be a matter of first impression in the Second Circuit, and moreover, there appears to be no New York case law directly on point.” Noting that one standard dictionary definition of the term legal costs includes attorney fees but two others do not, Miner said, “The only thing that is unmistakably clear here is that we grapple with a contract term that is susceptible to two, equally valid interpretations.” “Thus, even giving full weight to the general principle that we must construe the challenged provision” in the manner most favorable to the claimant, “we conclude that it is not unmistakably clear that the use of the term ‘legal costs’ in the Bonds was intended to obligate the Sureties to pay the Obligees’ attorneys’ fee in litigation between the Sureties and the Obligees over the Bonds,” he said. “In the final analysis, it is the Obligees who bear the heavy burden of persuading us to depart from the American Rule … and we find that they have not met their burden.” Judges Richard J. Cardamone and Guido Calabresi joined in the opinion. Lawrence S. Robbins of Robbins, Russell, Englert, Orseck & Untereiner of Washington, D.C., was lead counsel for the sureties. Howard L. Vickery of Cameron & Hornbostel in New York represented Braspetro.

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