Halinski v. ADS Grp. Acquisition, LLC (Del. Ch. (7/25) discusses the propriety of indemnification claims. The relevant SPA deferred payment of a $4,439,000 Tax Holdback to cover certain possible post-closing tax liabilities. Over time, the SPA required Purchaser to release the Tax Holdback to Sellers in three unequal installments. Purchaser released the First Intermediate Tax Holdback, but never paid the Second Intermediate Tax Holdback. The seller representative filed suit to recover the unpaid Tax Holdback.
On the eve of the deadline to respond to the Complaint, Purchaser sent an indemnification demand to Sellers. The indemnification demand alleged Sellers breached certain representations and warranties in the SPA. However, Purchaser did not follow Section 7.07 of the SPA which included a dispute resolution provision which provided that in the event of a dispute the parties were to negotiate in good faith to resolve the dispute before pursuing remedies.
Purchaser sought to avoid compliance with the dispute resolution provision by asserting compliance would be futile.
The Court noted Delaware courts regularly enforce contractual pre-suit dispute resolution provisions. According to the Court, courts excuse noncompliance with a pre-litigation dispute resolution provision where it “would be futile in achieving its intended purpose.” Performance is futile “only when the defaulting party expressly and unequivocally repudiates the contract or where the actions of the defaulting party have rendered future performance of the contract by the non-defaulting party impractical or impossible. Those circumstances were not present here, and the court found Purchaser’s position insufficient to prevent distribution of the Second Intermediate Tax Holdback.
Purchaser also claimed it could set off the indemnification claim against the Second Intermediate Tax Holdback. The Court rejected that argument. The reason was the SPA specifically required any remedy for breach of a representation to be recovered from a distinct holdback arrangement and after that from an R&W insurance policy.
