Rust Consulting Ltd v PB Ltd

An indemnity must first be construed to identify the liabilities, claims, proceedings or judgments it covers. Clear wording is required before an indemnifier becomes liable for a judgment obtained against the beneficiary, rather than only for the beneficiary’s actual liability.

Where the indemnity covers actual liabilities, the beneficiary must establish both liability and the amount recoverable. Notice of proceedings, participation in the defence, or concurrence in a consent judgment may support an estoppel, but none automatically creates one. The existence and scope of any estoppel depend on all the circumstances.

An asset-transfer indemnity covering liabilities reflected in the transferor’s accounts may extend to contingent liabilities identified in explanatory notes. A separate clause concerning contracts not fully performed did not extend to liabilities arising from obligations already performed.

Rust Consulting Ltd’s liquidators sought an indemnity from PB Ltd under an Asset Purchase Agreement. Rust had consented to judgment for £8,069,822.32 in proceedings brought by companies connected with a shopping-village development, alleging professional negligence and breach of contract.

The parties asked the Technology and Construction Court to determine whether the judgment fell within two indemnities. The issues included the meaning of “Liabilities” and “Contracts”, whether the relevant obligations had been fully performed by 31 December 1996, and whether PB’s knowledge or conduct created an estoppel preventing it from challenging Rust’s liability or the amount of the judgment.

1. Construction of the APA. The contingent contractual liability of Rust to the Eagle One companies was a liability attributable to Rust’s business. The 1996 accounts reflected such contingent liabilities because Note 17(d), read as part of the accounts, stated that PB had assumed the obligation to meet any contingent liability which crystallised. The definition was not limited to liabilities for which a specific monetary provision had been made.
2. The relevant agreements and warranty were “Contracts” in the broad sense. However, by 31 December 1996 Rust had substantially performed the 1995 and 1996 agreements. The only material unperformed obligation was the warranty obligation to maintain professional indemnity insurance until 2008. Clause 3.1 therefore applied to the relevant contingent liabilities, but not to the performed contractual obligations as “Contracts”.
3. Clause 8. Clause 8 dealt with contracts whose obligations remained unperformed and with any required assignment or novation. No contractual or legal consent to novation was required here. In any event, the clause could apply only to the outstanding insurance obligation and did not provide a further indemnity for the professional-negligence liabilities.
4. Scope of the indemnity. The words “in respect thereof” covered proceedings and claims concerning actual liabilities assumed by PB. They did not, without clear wording, make PB bound by a judgment entered against Rust. Rust therefore had to establish both that it was liable to the Eagle One companies and the amount of that liability. The authorities confirmed that contractual construction determines whether an indemnity extends to a judgment obtained against the beneficiary.
5. Estoppel. Notice to PB, its participation in the defence, and its concurrence in the consent judgment could support an estoppel. The court declined to prescribe fixed requirements. The existence and effect of any estoppel depended on the whole factual context, including PB’s conduct and the circumstances of the settlement.
6. The agreed issues were answered accordingly. Rust was not entitled to judgment merely because the consent judgment existed. The remaining estoppel issues required factual resolution, so it was not possible at that stage to determine whether PB was entitled to judgment.