Client Alerts

Getting Indemnification Right

Client Alerts | July 31, 2012 | Mergers & Acquisitions

Indemnification provisions are everywhere. From the most complex acquisition agreement to the simplest confidentiality contract, indemnities are included in a dizzying array of legal agreements. Real dollars are involved, and the consequences of a mistake can be profound. Yet the recently announced decision in 546-552 West 146th Street LLC v. Arfa, No. 603041-06, 2012 NY Slip Op. 05895 (N.Y. App. Div. Aug. 7, 2012), strongly suggests that unforced indemnification errors continue.

In this case the Appellate Division, First Department heard a cross-appeal from an order of the Supreme Court, New York County involving so-called “fees-on-fees” (e.g., a demand for legal fees incurred in enforcing the indemnity) in a matter involving an LLC and the specific language of Section 420 of the New York Limited Liability Company Law. Following the rule that indemnification statutes are strictly construed, the appellate court rejected a claim for legal expenses even where the operating agreement provided for indemnification to the maximum extent permitted by law and where Section 420 permits indemnification “from and against any and all claims and demands whatsoever.” The order disagreed with the dissent and certain relevant Delaware case law, and focused instead on New York public policy and indemnification case law involving corporations to extend to limited liability companies the presumption against the payment of legal fees as part of indemnification.

Experienced practitioners have for years employed a number of strategies to create and preserve legal fee indemnification rights where corporate entities have been involved. Here the participants apparently either were unaware of those mechanisms or placed undue, and in retrospect unjustified, faith in Section 420 to save them from the effects of New York’s innate hostility to the extension of indemnification to the payment of legal fees involved in establishing the right to indemnification. This case highlights the dangers of presuming that indemnification provisions that seem facially exhaustive necessarily achieve all the goals the signatories intend. Indemnification remains tricky in New York. Vigilance requires that parties to a contract consider each indemnification provision carefully and with fresh eyes to ensure that they will get from a court the results they are bargaining to receive.