What Is “Clear” Is Not So Clear: Delaware Addresses Contractual Fee-Shifting
It has long been the law in Delaware that fee shifting provisions, particularly when contained within indemnification agreements, must be “clear and unequivocal” before they will apply to direct claims between contracting parties (known as “first-party claims”). The recent decision in Schneider National Carriers, Inc. v. Kuntz – a breach of contract case that involves the purchase of a group of trucking companies – demonstrates that what constitutes a “clear and unequivocal” agreement, however, is not always unequivocally clear.
Delaware follows the “American Rule,” under which a party that prevails in litigation is typically not entitled to recover the costs, expenses, and legal fees it has to expend in order to secure a judgment in its favor. Exceptions to this rule are narrowly applied. As the Schneider court observed, “[w]ithout precise language setting forth an intent to shift fees, counsel should not expect the Court to deviate from the American Rule . . . .” This is particularly true where parties intend to embed a fee-shifting provision within a more general indemnification agreement, given that Delaware law creates a “presumption that an indemnity clause does not apply to first-party claims.”
Although the indemnification provision at issue in Schneider did not contain precise language requiring reimbursement of attorney’s fees relating to first-party claims, the court was nonetheless persuaded that the agreement as a whole should be read to require it. For instance, the agreement referred to certain payments, none of which “would arise from a third-party claim.” The agreement also defined the term “Third-Party Claim,” and so where that term was used within the definition of “Losses,” the court construed that as making “an express distinction between indemnifiable damages arising from third-party claims and non-third party claims.” These, among other contextual clues, were enough to “rebut” the presumption concerning first-party claims, even in the absence of an explicit and precise provision.
The decision is good news for parties litigating their right to be indemnified for fees paid in prosecuting or defending against first-party claims. What is clear is not so clear anymore.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
