The analysis, in the context of a post-merger dispute, of the nuances of an indemnification provision and whether or not escrow funds should be released was the subject of a recent Delaware Court of Chancery decision in Reddy v. 2^nd Chance Treatment Centers, LLC, C.A. NO. 2024-0193-SKR (Del. Ch., Dec. 12, 2024). Sitting by designation, Judge Sheldon Rennie of the Superior Court addressed the multiple claims that were the subject of a motion to dismiss. The decision examines closely the various provisions related to the notice requirements and the types of claims that would trigger the indemnification provisions as well as the requirements for releasing the escrow funds.

For purposes of this short blog post, I highlight the legal standards for declaratory judgment in the context of an indemnification provision, as well as the ability to seek specific performance to obtain the release of escrow funds. (I note in passing that some decisions over the y have raised questions about whether the payment of money as the type of requested relief renders the Court of Chancery’s equitable jurisdiction unavailable.)

Highlights

• The requirements for declaratory judgment are always useful to recall. In Delaware, “parties to a contract can seek declaratory judgment to determine any question of construction or validity and can seek a declaration of rights, status or other legal relations thereunder.” See Slip op. at 20 and footnote 106 and accompanying text.
• The court recited the four prerequisites for a declaratory judgment request to be justiciable: (1) It must be a controversary involving the rights or other legal relations by the party seeking declaratory relief; (2) It must be a controversy in which the claim of right or other legal interest is asserted against one who has an interest in contesting the claims; (3) The controversy must be between parties whose interest are real and adverse; (4) The issue involved in the controversy must be ripe for judicial determination. Id. at footnote 107.

• The court found that there was an actual and present controversy about terms of the relevant contracts and whether the escrow fund should be released. Slip op. at 20-21.

• After discussing the basics of the objective theory of contracts that Delaware follows, the court examined the specific provisions and nuances of the indemnification provisions involved. Id. at 21.

• The court refused to inject into the agreement an obligation to provide information beyond the provision in the agreement that one of the parties keep the other apprised. Slip op. at 22-23.

Specific Performance

• A place in the tool box of litigators should be found for the court’s statement of the law that a decree of specific performance is the appropriate form of relief to compel the release of funds from an escrow account. Slip op. at 29.
• After reciting the elements that must be proven “by clear and convincing evidence” to obtain specific performance, the court held that in this matter the plaintiffs lacked an adequate remedy at law in part because the terms of their agreement provided that “irreparable damage will occur in the event that any of the provisions of this agreement were not performed in accordance with their specific terms. . . .” Slip op. at 29.

• The court also disagreed that the requested relief of specific performance was premature. The court read the provisions of the agreement to provide that the escrow agent was not obligated to retain any amounts when no specific amount was set forth in the notice of claim.

• The court denied the motion to dismiss as to this count which specifically sought to require the buyer to enter into a joint release instruction to the escrow agent to release the escrow funds held for indemnification purposes.