Rust Consulting Ltd v PB Ltd

An indemnifier is not bound by a consent judgment against the party seeking indemnity merely because it knew of the underlying claim, conducted the defence and agreed the settlement. An estoppel requires, at minimum, that the indemnifier acted knowing or expecting that a claim would be made under the indemnity, and that the claimant acted in the knowledge or belief that it was entitled to indemnity. The court must consider all the circumstances, including fairness. Where an indemnifier has notice of an underlying claim and an opportunity to defend it, a judgment reached on the merits may ordinarily be conclusive; a settlement entered for the indemnifier’s own purposes is materially different.

Rust Consulting Ltd, in creditors’ voluntary liquidation, sought an indemnity from PB Ltd under an asset purchase agreement for its liability to Eagle One. The liability arose from a consent judgment entered against Rust after PB, acting through the group’s advisers, took conduct of the response to Eagle One’s professional-negligence claim and agreed that Rust should accept judgment.

On preliminary issues, Akenhead J had held that the indemnity covered actual liabilities but did not make the consent judgment conclusive. The issue at this trial was whether PB was estopped from challenging Rust’s liability and the amount recorded in the consent judgment.

1. The claim failed. Rust could not rely on the consent judgment alone to establish an indemnity claim. The preliminary judgment established that clause 3.1 covered actual liabilities, but did not make a judgment entered by consent conclusive against PB.
2. For an estoppel of the alleged kind to arise, the indemnifier must have notice that a claim is being made, or is expected to be made, under the contract or alleged contract of indemnity. Knowledge merely that a claim has been brought against the proposed indemnitee is insufficient where the indemnifier believes it has no obligation to indemnify and the indemnitee has not asserted such an obligation.
3. The relevant question is whether the indemnitee acted in the knowledge or belief that it was entitled to indemnity. Here, Rust’s liquidators did not know of the possible indemnity under the asset purchase agreement and did not rely on PB’s conduct as an indemnity obligation. PB and the group acted on the opposite assumption.
4. The court rejected any rigid formula based on notice, conduct of the defence and concurrence in settlement. Estoppel is an equitable doctrine and the court must consider all the evidence and circumstances. Preventing PB from challenging the consent judgment would give Eagle One a windfall, because the settlement exceeded the amount likely to have been recovered after a trial.
5. The court observed that, had Eagle One obtained judgment on the merits after PB had notice and an opportunity to defend, PB would ordinarily have been unable to challenge that judgment in a subsequent indemnity claim. The claim was therefore dismissed. Costs were reserved for further argument.