Indemnity Clauses – A Note of Caution
Posted by Romano Obertelli on 2nd November 2011
Romano Obertelli, a partner in the construction department, considers the recent case of Rust Consulting Limited v PB Limited which involved the High Court analysing the meaning of an indemnity clause.
Briefly, PB Limited had assumed “responsibility for the satisfaction, fulfilment and discharge of all of the outstanding Liabilities and Contracts of [Rust’s] business” and PB Limited also indemnified Rust Consulting Limited “against all proceedings, claims and demands in respect thereof.”
The main issue therefore was whether PB Limited was obliged to indemnify Rust Consulting Limited against the £8,000,000 liability to another third party pursuant to a consensual arrangement which had been made with Rust’s liquidators.
In a judgment which may surprise some, the Court found that the relevant clauses did not in themselves operate to create an automatic indemnity. For the indemnity to take effect it was necessary to establish that PB Limited was actually liable to the third party for damages either, as claimed, or for the amount of the consent judgment.
It certainly is a wake-up call for those contracting parties who consider that the very presence of the word “indemnity” in a clause will automatically entitle them to recover any sums which they have to pay to a third party under an underlying contract, regardless of the nature of such amounts and the procedure which has been followed in seeking to recover from an indemnifier.
It is essential at the outset to ensure that the indemnity clause is drafted accurately. Then, once an indemnified party believes that they may have a claim under an indemnity clause it is prudent practice to adopt the following approach (which may also go some way to establishing an estoppel preventing the indemnifier from challenging any judgment or settlement reached between the other parties):-
- Examine the wording of the indemnity clause carefully to see if any settlement which may be reached (and the manner of its conclusion) is binding upon the indemnifier.
- Comply at the earliest possible juncture with any and all pre-conditions which may be contained in such indemnity clause (for example, giving relevant notices to the indemnifier in a timely manner).
- Check to see if the indemnifier will approve any settlement or judgment before reaching any type of consensual agreement with a third party to an underlying contract to which the indemnity relates.
- Consider joining the indemnifier to any underlying litigation involving a third party.
