In the recent case of Durley House Ltd v Firmdale Hotels Plc [2014] EWHC 2608 (Ch), the High Court considered whether the defendant indemnifier was liable under a contract of indemnity, when the claimant indemnified party had not yet paid out the sums owed to the creditor.
Facts
The Claimant tenant entered into a lease for a property under which it had to pay rent to the Lessor. The Claimant separately entered into a management agreement with the Defendant, which required the Defendant to pay the rent due under the lease directly to the Lessor and also to indemnify the Claimant against all liability, damage or loss resulting from the Defendant's breach of the management agreement.
The Defendant breached the management agreement by failing to pay the rent due under the lease to the Landlord. Since the Lessor did not have a contractual relationship with the Defendant, the Lessor brought proceedings against the Claimant, who subsequently brought an action against the Defendant, seeking to recover in damages the overdue rent owed. During the proceedings, the Claimant entered into a settlement agreement with the Lessor. In short, the settlement agreement provided for the payment by the Claimant to the Lessor of the Claimant's "net recovery" in the present proceedings, in return for the discharge of the Claimant's existing liabilities to the Lessor.
The Defendant argued that it was not liable to pay damages for breach of the contract of indemnity because the effect of the settlement agreement was that the Claimant had been released from all liability for the rent under the lease. The Defendant also contended that since the Claimant had not paid the overdue rent to the Lessor, then, as a matter of law, it could not claim damages from the Defendant for breach of the contract of indemnity because it had not suffered any actual loss; payment by the Claimant to the Lessor was a pre-condition to establishing the Defendant's liability to pay the Claimant.
Decision
The High Court concluded that the settlement agreement did not release or discharge the Claimant from its liability to the Lessor for the overdue rent under the lease. Having found that the Claimant was in fact liable for the rent outstanding, the court had to decide on an appropriate remedy. The court had the option of making a declaration that the Defendant was liable to pay the rent to the Lessor, or of making an order for specific performance of the Defendant's promise to pay the rent directly to the Lessor. The court ruled that the Defendant was liable to the Claimant for damages for breach of indemnity and the Claimant was entitled to a money judgment against the Defendant.
The court held that, in equity, the Claimant would be entitled to a remedy from the Defendant, even if the Claimant had not paid the Lessor (the creditor) the overdue rent. If the lease had included an express provision that the indemnified party had to pay out sums to the creditor before it could claim reimbursement from the indemnifier, this clear intention between the parties would overrule the equitable principles, and paying out to the creditor would be considered a condition precedent to establishing the liability of the indemnifier to the indemnified. However, this was not the case here.
The court further ruled that it could order payment by the indemnifier to the indemnified, rather than the creditor, and there was no rationale for imposing limitations on the circumstances when payment to the indemnified would be permitted. The court also held that the Claimant was entitled to a money judgment by way of damages for breach of the rent payment obligation for the amounts outstanding under the lease. Specific performance was not appropriate given that the Claimant was entitled to a remedy by way of damages.
Comment
This case highlights how important it is, when drafting any written agreements, to include express provisions dealing with indemnity arrangements. These provisions may include details on who will pay an indemnity, when the indemnity should be paid, how much should be paid, and whether payment by the indemnified to the creditor is a pre-condition to liability under the indemnity, among other things. Express contractual provisions will usually prevail over equitable principles, so clarity is imperative.
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