Rust Consulting v PB

An indemnity in an asset-transfer agreement which requires the purchaser to assume specified liabilities and indemnify the transferor against proceedings, claims and demands in respect of them may cover bona fide settlements and sums reasonably incurred in defending claims. The wording did not require the transferor first to prove that the third-party claim established an underlying actual liability.

Where the indemnifier directed an insolvent transferor to consent to judgment in favour of a third party, it could not later deny the resulting liability or challenge the judgment’s correctness or reasonableness. Its deliberate commercial choice remained effective despite a mistaken view of the indemnity’s scope or of its own interests.

Rust, a non-trading subsidiary, transferred its assets and liabilities to PB Limited under an intra-group asset purchase agreement. PB Limited agreed to assume defined liabilities and contracts, and to indemnify Rust against proceedings, claims and demands in respect of them.

More than ten years later, a former client sued Rust for negligent engineering advice. Rust entered creditors’ liquidation. Acting through solicitors, and with the liquidators’ consent, PB Limited caused Rust to consent to judgment for the claimant’s full pleaded loss.

Akenhead J held that the indemnity covered only actual liabilities. Edwards-Stuart J held that PB Limited was not estopped from disputing Rust’s liability because it had not acted knowing or expecting a claim under the agreement. An earlier appeal had upheld a separate ruling concerning whether the liability was reflected in Rust’s accounts: [2011] EWCA Civ 899. Rust appealed the construction and estoppel rulings.

1. Appeals allowed unanimously. Akenhead J’s construction was wrong. Read in its commercial and contractual context, the indemnity was capable of covering a bona fide settlement of a third-party claim and reasonable costs incurred in its defence, whether that defence succeeded or failed. The placement of the reference to liabilities before the words “proceedings, claims and demands” did not require Rust to prove the third party’s underlying claim independently.

2. That construction better reflected the parties’ likely intentions. PB Limited’s construction would produce commercially paradoxical results: reasonable defence costs would be unrecoverable if a defence succeeded, and settlement protection would turn on a later assessment of the claim’s prospects. The agreement transferred the business to an intra-group purchaser while leaving Rust as an assetless shell.

3. PB Limited had caused Rust to consent to judgment in favour of Eagle. Rust could therefore rely directly on the liability created by that judgment. It was unnecessary to invoke estoppel, although PB Limited could also be described as estopped by its conduct from denying Rust’s liability.

4. PB Limited could not avoid that consequence because it had acted on erroneous legal advice or had misjudged its commercial interests. It deliberately procured the judgment for the group’s financial advantage. Finality of litigation and the priority of creditors’ interests after insolvency supported that conclusion.

5. Subject to any remaining defences, Rust was entitled to judgment for the sum claimed against PB Limited.

• Court of Appeal (Civil Division): allowed Rust’s appeals and reversed the construction and estoppel rulings.

• Technology and Construction Court (Akenhead J): held that the indemnity was limited to actual liabilities. A separate issue concerning whether the alleged liability was reflected in Rust’s accounts was upheld on an earlier appeal: [2011] EWCA Civ 899.

• Technology and Construction Court (Edwards-Stuart J): held that PB Limited was not estopped from disputing the true liability to the third party.