In Ashland LLC v. Samuel J. Heyman 1981 Continuing Trust for Lazarus S. Heyman (Del. Super. Ct. Nov. 10, 2020), the Complex Commercial Litigation Division of the Delaware Superior Court held that parties to a contract are required to cover their own legal fees absent clear and unequivocal fee shifting language, even where one party is required to indemnify the other party for losses associated with a breach of the contract and losses are defined to include attorneys’ fees and expenses.

Factual Background

Ashland LLC (“Ashland”) purchased three companies from The Samuel J. Heyman 1981 Continuing Trust for Lazarus S. Heyman, et al. (the “Sellers”) for $3.2 billion pursuant to a Stock Purchase Agreement, dated May 30, 2011 (the “SPA”). One of the companies purchased by Ashland pursuant to the SPA owned a property (the “Linden Property”) with significant environmental issues. Pursuant to the SPA, Linden Property Holdings LLC, an entity owned by the Sellers, repurchased the Linden Property for $1 upon closing of the SPA and assumed all environmental remediation obligations related to the Linden Property.

Analysis

In 2019, the Delaware Superior Court ruled that the Sellers had breached the SPA related to certain obligations of the Sellers related to the Linden Property. The court further ruled that the specific provisions of the SPA required the Sellers to indemnify Ashland for losses related to the Linden Property, and that the general indemnification provision in SPA required the Sellers to indemnify Ashland for any losses related to any breach of any covenant or agreement. Under both provisions, the Sellers are required to indemnify Ashland for its “Losses”, which were defined as (emphasis added):

“…with respect to any Indemnified Party, and 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.”

After Ashland won its breach of contract claims related to the Linden Property issues, it sought indemnification for its attorneys’ fees incurred in connection with litigating the contract claims and counterclaims under the SPA. The court ruled that Ashland was not entitled to indemnification for such attorneys’ fees.

The court reasoned that Delaware follows the American Rule, “which provides that each party is generally

expected to pay its own attorneys’ fees” and that 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.” The court held the SPA’s “plain language…does not show a clear and unequivocal intent to shift fees.”

Further, the court noted that a provision of the SPA dealing with termination of the SPA did include specific fee shifting language. Section 8.2(c) of the SPA provides (emphasis added):

“The parties acknowledge that the agreements contained in Section 8.2 are an integral part of the Transactions, and that, without these agreements, the parties would not enter into this Agreement; accordingly, if Buyer fails to promptly pay the amount due pursuant to Section 8.2(b), and, in order to obtain such payment, the Seller Parties commence a suit that results in a judgment against Buyer for the amount set forth in Section 8.2(b), Buyer shall pay to the Seller Parties their costs and expenses (including attorneys’ fees) in connection with such suit, together with interest on such amount or portion thereof at the Interest Rate in effect on the date such payment was required to be made through the date of payment.”

As a result of the language in Section 8.2 of the SPA, the court noted that the parties knew how to draft explicit fee-shifting language in other provisions which further demonstrates that that the parties did not intend for Losses to encompass fee-shifting on first-party claims. The court held that if the parties use fee-shifting language in one section of the agreement and fail to include such language in another, it “indicates a lack of intent to create a clear and unequivocal agreement to shift fees in first-party actions.”

Key Takeaways

As shown above, transactional attorneys must be sure to draft clear and unequivocal language regarding responsibility for attorneys’ fees in first party claims under contracts if their clients want an indemnifying party to be responsible for the attorneys’ fees of the indemnified party. Absent such language, indemnified parties may be stuck covering their attorneys’ fees despite winning on the merits of an indemnification claim.

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