Lomax Leisure Ltd. v Fabric London Ltd.

Where an asset sale agreement transfers the benefit and burden of a contract, the purchaser may assume liability for obligations arising after the contract has been terminated, including secondary payment liabilities. The agreement must be construed in light of its commercial purpose and the benefits acquired by the purchaser.

An indemnity covering claims made against the vendor may extend to the underlying contractual liability and the costs of defending that claim. It does not ordinarily extend to costs incurred by the vendor in pursuing its own counterclaim, including costs used to establish a set-off where the benefit of that set-off accrues to the vendor or its creditors.

Lomax Leisure Limited sought declarations under CPR Part 24 that Fabric London Limited was liable to indemnify it for liabilities and costs arising from Marpaul (Southern) Limited’s claim under a building contract.

The building contract had been terminated before the parties entered into an asset sale agreement. The agreement nevertheless referred expressly to the benefit and burden of the building contract and required the purchaser to indemnify the vendor against claims, costs and demands concerning the contracts or assets.

The central issues were whether liabilities remaining after termination fell within the transferred contracts, and whether the indemnity covered Marpaul’s claim and associated costs, including costs of the company’s counterclaim.

1. The application succeeded in part. The company was entitled to declaratory relief and an indemnity under clause 8.1, subject to the limits identified below.

2. The building contract had been terminated by the company’s notice following Marpaul’s company voluntary arrangement. The termination left secondary consequences to be resolved, including valuation of work performed, payment liabilities and claims concerning the cost of completion.

3. The definition of “the Contracts” covered the benefit and burden of the building contract, including obligations arising from its termination. The purchaser’s construction would conflict with the commercial purpose of the agreement, which was to obtain the benefit of the completed works and the building contract. The purchaser therefore assumed the risk of liabilities arising under that contract.

4. Clause 8.1 required the purchaser to indemnify the vendor against claims made against it in respect of the contracts or assets. That included Marpaul’s primary claim and the company’s liability to Marpaul. It also included costs solely attributable to evaluating and defending Marpaul’s claim.

5. The indemnity did not cover costs attributable to the company’s counterclaim. Under clause 8.6, the company was required to pursue claims arising from the reserved contracts at its own cost and expense. The same allocation applied where the counterclaim operated as a set-off, because the resulting benefit accrued to the company’s liquidation and creditors.

6. The company was therefore entitled to an indemnity for its liability to Marpaul and costs solely attributable to Marpaul’s claim, but not for costs attributable to the counterclaim or its use as a set-off.