UK: Indemnity Claim For Amounts Not Yet Paid Out

Last Updated: 1 September 2014
Article by Fiona Ball

In Durley House Ltd v Firmdale Hotels (2014), the defendant had given the claimant an indemnity for the claimant's rent obligations but subsequently failed to pay the required sums. The defendant contended that it was not liable to pay damages for this breach because the claimant had not paid the rent, and therefore had suffered no loss. The High Court rejected this argument, holding that equitable principles applied and the defendant was required to pay a sum equal to the unpaid rent, as damages for breach of the indemnity.

This case serves as a useful reminder that when an indemnity is given, the indemnifying party should ensure there is a written agreement which clearly sets out who it will pay, when, how much, and whether payment by the indemnified party is a condition precedent to liability under the indemnity

Facts

The claimant signed a lease for a property which required the claimant to pay rent to the landlord. The claimant also entered into a management agreement with a third party (the defendant) which imposed a contractual obligation on the defendant, owed to the claimant, to pay the rent required under the lease to the landlord. The management agreement also contained an obligation on the defendant to indemnify and keep indemnified the claimant against all operating expenses (including but not limited to "rent"). In breach of the management agreement, the defendant failed to pay anything to the the landlord or the claimant.

The claimant brought an action against the defendant to enforce these contractual obligations, seeking a judgment for the amount of overdue rent as damages for breach of the indemnity. The defendant rejected this claim on the basis that the tenant had not paid any of the overdue rent and had therefore incurred no loss. In response, the claimant argued that that it had in fact suffered a loss equal to the amount of unpaid rent, because the defendant's failure to pay meant that the claimant's liability to the landlord was increased by that amount.

Having found that the claimant was liable for the overdue payments, the court was required to choose an appropriate remedy. Potential remedies included a declaration that the defendant was liable to pay the rent to the landlord, or an order for specific performance of the defendant's promise to pay the rent straight to the landlord. In the end, applying the principles stated below, the High Court ordered payment of the overdue rent to the claimant, as damages for breach of the indemnity.

Review of applicable principles

The High Court reviewed principles derived from earlier case law concerning claims under an indemnity and concluded:

  • At common law it is unclear whether the requirement of prior payment to the creditor is a condition precedent to the right to be indemnified. In any event, the position in equity prevails and there is no doubt that a party can enforce an indemnity even before it has paid out for the liability covered. – This default position can be changed by contractual terms, so that the indemnified party must pay out before it can claim reimbursement.
  • The court can award various remedies for breach of an indemnity, including a declaration, or an order directing payment to the indemnified party, to that party's creditor, or into a fund. If payment is made directly to the indemnified it is of no concern to the indemnifier whether or not that payment is passed on to the creditor.
  • The court's power to order payment straight to the indemnified party, even before it has paid out the sums covered, is not limited to cases where the paying party is jointly or primarily liable for the obligation, or contractually bound to pay the creditor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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