A recent Delaware Court of Chancery decision interpreted an indemnification clause and rejected the applicability of equitable defenses to a strictly legal claim.  I highlighted the recent decision in NASDI Holdings v. North American Leasing, Inc., C.A. No. 2017-0399-KSJM (Del. Ch. Apr. 8, 2019), in an article published in the current issue of the Delaware Business Court Insider, that I co-authored with Jessica Reno of Eckert Seamans.  The article is copied below:

Chancery Interprets Contractual Indemnification Clause

By: Francis G.X. Pileggi and Jessica L. Reno

The Delaware Court of Chancery recently analyzed an indemnification clause and performed other contract interpretation in NASDI Holdings, LLC, et al. v. North American Leasing, Inc., et al., C.A. No. 2017-0399-KSJM (Del. Ch. Apr. 8, 2019). The Court also rejected the applicability of equitable defenses to strictly legal claims.

The dispute involved the sale of a demolition and site-redevelopment company pursuant to an Ownership Interest Purchase Agreement (“Purchase Agreement” or “Agreement”).  Under the Agreement, the seller Plaintiffs were obligated to maintain payment bonds secured by a letter of credit for ongoing construction projects.  The purchaser eventually withdrew from one of the projects, and the surety drew more than $20 million on the letter of credit that the seller maintained.  The seller demanded indemnification for their losses pursuant to the Agreement, and the purchaser refused.

It appears the purchaser did not dispute whether the seller incurred losses, as defined in the Purchase Agreement.  Rather, the purchaser argued the seller’s claims for indemnification were barred by the “Notice of Claim” requirements in the Purchase Agreement.

In an attempt to avoid indemnifying the seller for their losses under the Agreement, the purchaser argued that the language in the Notice of Claim provision included a qualification, thereby limiting the amount of time during which seller could make a claim for indemnification.  Specifically, the purchaser argued that the first clause of the Notice of Claim provision that required notice of indemnification within a reasonable time, and which applied to letters of credit, was limited by the second clause.  The second clause of the provision provided a deadline of the termination date or the survival period for claims pertaining to representations or warranties.  The purchaser attempted to argue that the second clause did not deal only with representations or warranties, but to all claims, including those for letters of credit.

In determining that the purchaser was required to indemnify the seller, the Court interpreted the Notice of Claim provision to include an exception to the reasonable time standard, rather than a qualification.  Applying longstanding principles of contract interpretation, the Court held that the clear language of the first clause applied to all claims of indemnification, including letters of credit, while the second clause, an exception to the general provision, applied only to representations or warranties.  This opinion features many useful footnotes with citations to sources that support the court’s reasoning, including the court’s analysis of sentence structure and syntax.

The Court noted that the purchaser’s reading of the Notice of Claim provision would have undermined the entire purpose in the Purchase Agreement of indemnification.  See generally, Glidepath, Ltd. v. Beumer Corp., C.A. No. 12220-VCL (Del. Ch. Nov. 26, 2018) (Transcript at 4-6) (In a bench ruling, the Court rejected an argument that the indemnification clause could be used as a broad liability cap, such as for a claim that the payment provision of an agreement of sale was breached—as opposed to a breach of the representations and warranties clause).

The Court also agreed with the seller’s additional arguments in their motion for summary judgment related to the purchaser’s third and fourth affirmative defenses of unclean hands and failure to mitigate damages, respectively.  The Court granted the motion with respect to unclean hands, holding that equitable defenses, including that of unclean hands, do not apply to purely legal claims.

Had the present dispute been brought in a court of law, the purchaser would not be entitled to that equitable defense, and it should not have an advantage simply because the claims were pending in a court of equity.  With respect to purchaser’s affirmative defense related to mitigation of damages, the Court held that the purchaser’s argument relied on events that occurred before the breach relevant to the litigation, whereas the duty to mitigate arises only after a breach has occurred.