The Latest Word on Fee-Shifting Pursuant to an Indemnification Provision
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Joni Mitchell famously declared that, despite her having “looked at clouds from both sides now, [and] from up and down,” she really didn’t “know clouds at all.” Instead, according to her 1969 song, Both Sides Now, all she really knew about clouds (or life and love for that matter) were the “illusions” they created. Having similarly examined, “from both sides now, [and even] from up and down” the caselaw discussing the effectiveness of indemnification clauses that purport to cover attorneys’ fees incurred by the indemnified party in enforcing the obligations of the indemnifying party for so called “first party claims,” I too am wondering whether I really know anything about this subject at all, or if instead it’s just the caselaw’s “illusions I recall.”

We covered some prior caselaw on this issue in a 2019 and a 2020 blog post,[1] and we even provided an in-depth review of the issue in a 2016 four-part series.[2] But a recent Delaware case, Schneider National Carriers, Inc. v. Kuntz, 2022 WL 1222738 (Del. Super. April 25, 2022), has seemingly added some important nuances to the prior guidance from the caselaw concerning the means by which an indemnification clause can (or cannot) be deemed a fee-shifting provision.

Delaware’s position on indemnification provisions constituting fee shifting obligations (or not) has been stated thus:

Delaware follows the American Rule, “which provides that each party is generally expected to pay its own attorneys’ fees.” The Court should not interpret indemnification provisions “in an expansive way that would be inconsistent with the American Rule.” Indemnification provisions “are presumed not to require reimbursement for attorneys’ fees incurred as a result of substantive litigation between the parties to the agreement absent a clear and unequivocal articulation of that intent.” “There is no specific language that must be used in order for an indemnity provision to provide for recovery in first-party actions.” However, a party is not entitled to attorneys’ fees under an indemnification provision “when there is no specific language in the indemnification provision … that covers fee-shifting.”[3]

It has been far from clear, however, what constitutes “specific language … that covers fee-shifting.” Accordingly, in Winshall v. Viacom International, Inc., the following indemnification provision was deemed to only cover attorneys’ fees arising from third party claims, not first party claims, because there was no specific language covering the reimbursement of attorneys’ fees for directly enforcing the breaching party’s obligations (i.e., for first party claims): 

a) Indemnification. Subject to the limitations set forth in this Article VIII, from and after the Effective Time, each of Parent and MergerCo, jointly and severally, shall indemnify, defend and hold harmless each Merger Consideration Recipient against any and all Losses actually incurred or suffered by any such Merger Consideration Recipient as a result of:
(i) the breach of any representation or warranty of Parent or MergerCo set forth in this Agreement or in any Ancillary Document; and
(ii) the breach of any covenant or agreement of Parent or MergerCo contained in this Agreement or in any Ancillary Document.[4]

And “Losses” were defined as:

any and all losses, liabilities, damages, claims, awards, judgments, diminution in value, Taxes, fees, costs and expenses (including reasonable attorneys’ fees and expenses, expenses of investigation, defense, prosecution and settlement of claims (including any claims under Article VIII hereof), court costs or enforcement of the provisions of this Agreement) suffered or incurred by such Person, plus any interest that may accrue on the foregoing.[5]

The provision clearly covered Losses from “any breach,” which would seem to include a breach resulting from both a third party, and a first party, claim. But the court was unpersuaded that this was good enough given the strong public policy supporting the American Rule.

The court was similarly unpersuaded, in Ashland LLC v. The Samuel J. Heyman 1981 Continuing Trust for Lazarus S. Heyman, that first party claims were covered by an indemnification clause in the SPA that specifically indemnified the buyers for all “Losses actually suffered or incurred by any of the Buyer Indemnified Parties, to the extent arising out of [the excluded liabilities or a breach of any covenant of the sellers in the SPA].” “Losses” were defined in that SPA as:

all losses, liabilities, claims, obligations, judgments fines, settlement payments, award or damages of any kind actually suffered or incurred by such Indemnified Party after Closing (together with all reasonably incurred cash disbursements, costs and expenses, including costs of investigation, defense and appeal and reasonable attorneys’ and consultants’ fees and expenses), whether or not involving a Third Party Claim.[6]

Notwithstanding the language “whether or not involving a Third Party Claim,” the court said the provision was not sufficiently “clear and unequivocal.” But importantly, the court did note that there was a separate fee-shifting provision regarding the failure to pay the termination fee; and the presence of that provision was influential in the court’s determination that the indemnification provision by itself was insufficient to constitute a fee-shifting provision for other claimed breaches of the agreement involving first party claims (because the parties knew how to draft an actual fee-shifting provision if one was intended).[7]

In Kuntz, the most recent decision, the indemnification provision specifically related to the failure of the buyer to make any payments to the seller related to a potential earn-out payment:

the buyer will indemnify and hold harmless the Sellers … from and against any and all Losses incurred or suffered by any Seller Indemnified Party based upon, arising out of, or otherwise in respect of any … breach of any covenant (including making any Deferred Consideration Payment, or any required Annual Contingent Payment [Earnout Payment] or Annual Contingent True-Up Payment).

“Losses” were then defined to include “reasonable fees and disbursements of legal counsel,” but there was no explicit language regarding the reimbursement of attorney’s fees for direct claims between the buyer and the seller. Nonetheless, the court was persuaded that this language was in fact sufficient to constitute a fee-shifting provision.

Why? Well, the court listed a number of reasons after reviewing the caselaw, but two reasons stood out. First, the court could discern no circumstance in which there could arise any third party claims as a result of the breach of the buyer’s covenants in favor of the seller—thus only first party claims were contemplated by the indemnification provision that was only triggered by a breach of these covenants by the buyer. Second, unlike in Ashland, there was no other fee shifting provision in the acquisition agreement—thus, the indemnification provision stood on its own. Accordingly:

The indemnification provision in the SPA does not expressly state that it covers first-party claims. But TranSched and its progeny do not require that an indemnity clause expressly state that it covers first-party claims. They create a presumption that an indemnity clause does not apply to first-party claims. The presumption is rebutted if the language of the agreement reveals a “clear and unequivocal articulation” of the parties’ intent that it applies to first-party claims. The language embodying that intent must be “explicit.” Explicit means “[e]xpressed without ambiguity or vagueness.” Applying the well-established principles of contract construction to the specific facts of this case, and reading the SPA as a whole, Section 7.1(c) clearly and unambiguously reflects the parties’ intent that it applies to first-party claims.[8]

Hmm. Okay. But it is going to be the rare agreement where the indemnification provision would apply to covenants that are only capable of giving rise to first party, as opposed to third party, claims. After all, a breach of a representation and warranty by the seller can give rise to both first party and third party claims. So, here we are with those clouds again—“now they only block the sun[,] [t]hey rain and they snow on everyone.”[9] What to do?

A recent merger agreement involving an acquisition of a private company by a public company appears to have attempted to address the Ashland lack of clear and unequivocal intent to cover first party claims by adding the italicized (and more importantly, bolded) language to the definition of “Damages” subject to the indemnification clause: 

all damages, losses, out-of-pocket expense, Liabilities, fines, claims, forfeitures, obligations, Actions, Taxes, judgments, interest, awards, penalties, fees, costs or expenses (including reasonable out-of-pocket expenses of investigation and reasonable and documented attorneys’ fees and expenses in connection with any Action, whether involving a Third-Party Claim or a claim solely between the Parties hereto, to enforce the provisions hereof[.]

A few other recently filed private company acquisition agreements involving a public company acquirer have similar language. Is that clear and unequivocal enough? It would seem so, particularly if there is no stray fee-shifting clause that speaks to a “prevailing” party’s right to recover its fees in a dispute between the parties under some specific section of the agreement. But then again, while I don’t think so, it may be just those clouds producing “[r]ows and flows of angel hair[,] [a]nd ice cream castles in the air.”[10]

Are there even more explicit ways to make your intent clear that indemnifiable losses include attorneys’ fees incurred in direct claims against the indemnified party for breaches of the agreement, and not just those incurred in defending against third party claims? Perhaps.

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Endnotes    (↵ returns to text)
  1. Glenn West, The First-Party/Third-Party Claim Distinction in Indemnification Provisions—Unambiguously Broad Is Not Necessarily the Same Thing as “Clear and Unequivocal”, Weil’s Global Private Equity Watch, December 1, 2020, available here; Glenn West, Indemnify is a Funny Word Carrying Historical Baggage—Be Aware and Use with Care, Weil Insights, Weil’s Global Private Equity Watch, December 17, 2019, available here.
  2. Peter Feist & Jessica N. Djilani, Indemnification Provisions: Are Attorneys’ Fees (And Other Expenses) Incurred In Claims Between Contracting Parties Covered? – Part 1, Weil’s Global Private Equity Watch, June 9, 2016, available here; Peter Feist & Jessica N. Djilani, Indemnification Provisions: Are Attorneys’ Fees (And Other Expenses) Incurred In Claims Between Contracting Parties Covered? – Part 2, Weil’s Global Private Equity Watch, June 14, 2016, available here; Peter Feist & Jessica N. Djilani, Indemnification Provisions: Are Attorneys’ Fees (And Other Expenses) Incurred In Claims Between Contracting Parties Covered? – Part 3, Weil’s Global Private Equity Watch, June 23, 2016, available here; Peter Feist & Jessica N. Djilani, Indemnification Provisions: Are Attorneys’ Fees (And Other Expenses) Incurred In Claims Between Contracting Parties Covered? – Part 4, Weil’s Global Private Equity Watch, July 7, 2016, available here.
  3. Ashland LLC v. The Samuel J. Heyman 1981 Continuing Trust for Lazarus S. Heyman, 2020 WL 6582958, at *6 (Del. Super. Nov. 10, 2020) (internal citations omitted).
  4. Winshall v. Viacom International, Inc., 2019 WL 5787989 (Del. Super. November 6, 2019).
  5. Id.
  6. Ashland LLC v. The Samuel J. Heyman 1981 Continuing Trust for Lazarus S. Heyman, 2020 WL 6582958 (Del. Super. Nov. 10, 2020).
  7. See discussion of this case in Glenn West, The First-Party/Third-Party Claim Distinction in Indemnification Provisions—Unambiguously Broad Is Not Necessarily the Same Thing as “Clear and Unequivocal”, Weil’s Global Private Equity Watch, December 1, 2020, available here.
  8. Schneider National Carriers, Inc. v. Kuntz, 2022 WL 1222738, at *31 (Del. Super. April 25, 2022)(internal citations omitted).
  9. Joni Mitchell. Lyrics to “Both Sides Now.” Genius, available here.
  10. Id.