Delaware Courts Closely Examine Indemnification Claims for Attorneys’ Fees, “Whether or Not” the Parties Intend

In Samuel J. Heyman 1981 Continuing Tr. v. Ashland LLC (Sep. 12, 2022), the Delaware Supreme Court recently resolved a contractual dispute over potentially massive liability for cleaning up the Arthur Kill waterway in New Jersey. The contract at issue was a stock purchase agreement (SPA) in which Ashland LLC purchased 100% of the stock of an entity owned by a set of trusts affiliated with the Heyman family, but then immediately transferred back a particular property in Linden, New Jersey, to another entity affiliated with the Heyman parties. The Delaware Superior Court had granted summary judgment to Ashland on this issue, concluding that the relevant contractual provisions in the SPA (which used some fairly convoluted language to divide liabilities relating to that property) unambiguously allocated these environmental liabilities to the Heyman parties — despite having earlier in the case determined the contract was ambiguous. On appeal, the Delaware Supreme Court determined that the contract was unambiguous in the other direction and clearly allocated all “offsite” environmental liabilities (including cleanup of the Arthur Kill waterway) to Ashland.

Although the court did not reach it in resolving this appeal, the case also raised another contractual interpretation issue of broad significance: the effect of an indemnification provision that allowed a party to recover “reasonable attorneys’ fees and consultants’ fees and expenses[], whether or not involving a Third Party Claim.” Ashland argued that this “whether or not” language clearly and unequivocally covered attorneys’ fees incurred in first-party litigation, and sought to recover its fees from litigating the contractual dispute. Recent Delaware precedent casts substantial doubt on such interpretations. Last year, the Delaware Supreme Court affirmed a chancery court decision rejecting a party’s request for first-party litigation fee-shifting under nearly identical language. The chancery court explained that the “whether or not” language should not be interpreted as “a backhanded way of saying ‘including legal fees incurred in first party claims’” because “sophisticated parties, negotiating at arms-length, would [not] have chosen the phrase ‘whether or not arising out of third party claims’ to explicitly state that this provision was meant to shift fees in disputes between the parties.” The chancery court’s interpretation was bolstered by another provision of the contract, in which the parties had explicitly permitted fee-shifting for attorneys’ fees in first-party litigation, but only under narrow circumstances. The inclusion of a “clear and unequivocal articulation of an intent to shift fees” elsewhere in the same agreement “[u]nderscore[d]” that the parties did not intend for the general indemnification provision to also shift first-party litigation fees more broadly.

In high-stakes contractual disputes, attorneys’ fees can be substantial. Recovery of those fees often becomes a high priority, falling closely behind winning the case itself. But the groundwork for a successful claim for fee-shifting must be laid in advance, well before any dispute has arisen. Recent Delaware precedent, and the issues raised — though not decided — in the recent Heyman appeal, are a reminder that if an indemnification provision is intended to include first-party litigation fees, it should not be drafted to invoke those fees by implication or inference. Instead, indemnification provisions should be drafted to unmistakably, and in plain English, demonstrate an intent to shift fees to the prevailing party in first-party litigation.

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