In Levy v. HLI Operating Co., Inc., 2007 WL 1452934 (Del. Ch., May 16, 2007), read opinion here, the Delaware Chancery Court decided as a matter of Delaware public policy and statutory interpretation, that a contract will not be enforced to the extent that it allows "fees on fees" to be paid by a corporation for pursuing indemnification claims, even if the claims are unsuccessful. For more background details on the case, see here for a summary on this blog of a prior decision in this matter by the Chancery Court.
The court relied on the statutory framework underlying DGCL Section 145 and the reasoning of prior Delaware cases that allowed for "fees on fees" to be collected when a claim for indemnification was successful. The court further reasoned that:
Because a Delaware corporation cannot take actions which our law does not countenance, a contract provision which mandates indemnification for fees on fees in unsuccessful litigation is invalid since it flouts the lucid precepts of Cochran and Fasciana.
This is a rather rare exception to the "freedom of contract principle" and the willingness, in general, of Delaware courts to enforce contract terms between sophisticated parties that structure their relationships in business and corporate dealings.
The Court also explained the clear distinctions between the concepts of indemnification, contribution and subrogation, which it noted were often used wrongly as being interchangeable.