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Note: To secure its obligations under a demolition and redevelopment contract, NASDI, LLC (Subcontractor) caused Zurich American Insurance Company (Bond Issuer) to issue performance bonds cumulatively for USD 20,359,375in favor of Skanska Koch Kiewit Infrastructure Company (Contractor). Pursuant to an Ownership Interest Purchase Agreement (Agreement), North American Leasing, Inc. (Purchaser) purchased Subcontractor and another company from NASDI Holdings, LLC (Seller). Under Section 7 of the Agreement, Seller’s parent company, Great Lakes Dredge and Dock Corporation (Parent), agreed to maintain the outstanding performance bonds while Purchaser took control over Subcontractor’s projects. Accordingly, Parent/Applicant caused Bank of American (Issuer) to issue a letter of credit that was, as amended, for USD 30,000,000 in favor of Bond Issuer/Beneficiary and Purchaser agreed to indemnify Parent/Applicant for any claims “arising out of, or relating to” the performance bonds and LC.

A dispute arose and, at the direction of Purchaser, Subcontractor notified Contractor “of its intent to demobilize” from the underlying project. Thereafter, Contractor declared Subcontractor in breach and demanded payment from Bond Issuer/Beneficiary. Bond Issuer/Beneficiary in turn made a demand on the letter of credit, which was honored. When Parent/Applicant demanded indemnification from Purchaser, Purchaser refused and Parent/Applicant and Seller sued Purchaser for breach of contract, equitable subrogation and declaratory judgment. After Purchaser failed to have the proceedings dismissed or stayed, Seller and Parent/Applicant moved for summary judgment. The Court of Chancery of Delaware, McCormick, Vice Chancellor, granted summary judgment in favor of Seller and Parent/Applicant.

Section 9.2(e) of the Agreement required Purchaser to indemnify Seller and Parent/Applicant for losses in connection with the bonds and LC. Purchaser argued, however, that the indemnification demands were barred by the notice provisions of Section 9.3(a) which required that they be made “within a reasonable time after” Seller and Parent/Applicant became aware of potential claims “but in any event before the later” of dates defined by the contract “with respect to particular representation or warranty to which the matter applies”. Purchaser argued that the timing clause constituted a blanket qualification for the demands, which Seller and Parent/Applicant failed to meet. The Vice Chancellor disagreed, however, noting that Purchaser “los[t] sight of the purpose of the indemnification provisions as a whole” which were to “ensure that [Seller and Parent/Applicant] are able to notice indemnification claims relating to representations and warranties for the life of those representations and warranties, not to cut short indemnification rights relating to the Letter of Credit.” Thus, Purchaser was found to have breached the indemnification provisions of the Agreement as a matter of law.

Purchaser also raised two affirmative defenses, arguing that the claim of indemnification against it should be barred under the equitable doctrine of unclean hands or, alternatively, under the contract doctrine of mitigation of damages. As to the first defense, the Vice Chancellor noted that Delaware courts of law generally do not allow for an equitable affirmative defense against a “purely legal claim”. Because allowing Purchaser to assert such a defense in the Chancery Court would undermine the purpose of placing the parties in the same position had they litigated in a court of law, the Vice Chancellor granted summary judgment on the issue in favor of Seller and Parent/Applicant. As to the defense of failure to mitigate, the Vice Chancellor noted that Purchaser sought to assert the defense on the basis of events occurring before the claim of breach at issue while the onus to mitigate damages generally arises after a breach. Accordingly, the Vice Chancellor granted summary judgment in favor of Seller and Parent/Applicant as to the mitigation defense.

[MJK]

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