Stornoway 2011 Ltd v SIV Portfolio Plc (In Receivership)

A contractual indemnity may be subject to a monetary cap where the agreement makes it subject to payment rules which, through incorporated definitions, establish the cap and the treatment of excess claims. The relevant twelve-month period begins when a quantified demand is made, because the indemnity obligation is to pay the amount of the loss on demand. A cap measured over a rolling twelve-month period limits recovery by reference to the preceding twelve months at each fresh liquidated demand. It does not provide separate consecutive annual allowances.

The claimant, as assignee of the investment manager, sought payment under an indemnity in an Investment and Funding Management Agreement. The claim concerned legal costs exceeding US$3.5 million incurred in proceedings in the United States. The parties agreed that the costs were reasonably incurred and prima facie within the indemnity.

The remaining issues were whether the indemnity was subject to a US$1 million cap, when the initial twelve-month period began, and whether the cap applied by consecutive or rolling periods.

1. The court resolved all three issues in favour of the defendant.

2. The indemnity in clause 21.1 was expressly made subject to the Indemnity Cap Excess Payment Rules. Those rules operated by reference to the incorporated definitions of Indemnity Cap, Indemnity Cap Excess and Indemnity Cap Excess Payment Rules. Read together, they made the manager’s indemnity subject to the relevant cap and to the provisions governing payment of any excess.

3. The reference in Senior Expenses (d) to payments up to any relevant Indemnity Cap did not show that the manager had no cap. The word “any” accommodated entities within the contractual structure which were not subject to a cap or to the same rules. The manager was expressly subject to the rules under clause 21.1.

4. The relevant date for testing the cap was when the indemnity payment became payable, rather than when payment was made. This prevented the defendant from manipulating the cap by delaying payment. Similarly, clause 21.2 prevented delay in giving notice from affecting the obligation to indemnify.

5. The first twelve-month period began on the first quantified demand. A general notice that losses might arise did not trigger the period. The operative demands were made on 29 June, 4 November and 2 December 2010.

6. The cap applied to any twelve-month period measured on a rolling basis. It therefore required retrospective measurement over the preceding twelve months at each fresh liquidated demand, rather than separate consecutive twelve-month periods with a new US$1 million allowance.