Morgan Grenfell Development Capital Syndications Ltd v Arrows Autosports Ltd. & Ors

An indemnity is construed by reference to its language, contractual purpose and the relevant factual matrix. Where financing documents show that related investment entities were treated as participants in a continuing financing arrangement, broad words such as affiliates and associates may include fellow subsidiaries and investment funds. Losses need only have a sufficiently broad connection with advances under the facility. An original lender may claim under an indemnity on behalf of persons to whom the benefit of the lending position has passed. Contractual interest may constitute recoverable loss, subject to the indemnity cap.

The claim arose from an indemnity given by Thomas Walkinshaw in connection with an increase in an overdraft facility granted to Arrows Autosports Ltd. The overdraft was later transferred economically to investment funds associated with the Morgan Grenfell entities. The principal issues were whether the funds were within the class of indemnified persons, whether their unrecovered investment constituted loss within the indemnity, whether Morgan Grenfell Development Capital Syndications Ltd could sue on their behalf, and whether contractual interest was recoverable.

1. Construction of the indemnity. The indemnity was not to be construed in isolation from the overdraft facility, deed of variation, deed of arrangement and the surrounding financing dealings. The relevant approach required both a linguistic analysis and a broader assessment of the contract’s purpose and commercial context.
2. The expressions affiliates and associates were not confined to statutory definitions concerning control, share ownership or group accounts. In context they included fellow subsidiaries and other entities within the wider Morgan Grenfell investment structure, where they operated in the same broad commercial sector. All five funds were therefore indemnified persons.
3. The provision covering losses related to, or arising as a result of, advances under the overdraft was deliberately broad. The funds’ shortfall in recovering the sums advanced was sufficiently connected with the advances, notwithstanding that the funds had acquired the overdraft position from the original lender.
4. Applying Beswick v Beswick [1968] AC 58, the original lender could claim on behalf of the funds and would be accountable to them for any recovery. It had itself suffered no recoverable loss because it had been reimbursed by the funds.
5. Unpaid contractual interest was capable of constituting loss within the indemnity. The contractual interest rates therefore applied, subject to the cap on liability. The alternative assessment of interest at base rate plus 3 per cent was unnecessary.
6. The alternative arguments based on Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 and res inter alios acta did not require determination. The latter argument was in any event inconsistent with the principle that payments reducing an indemnified loss reduce the indemnifier’s liability.
7. Mr Walkinshaw was liable under the indemnity to MGDCS claiming for the funds, subject to the contractual cap. The precise order and interest calculation required further discussion.