K/S Preston Street v Santander (UK) Plc

An indemnity in a fixed-rate loan agreement may apply alongside contractual early-redemption fees where the agreement states that the indemnity is payable in addition to those fees. However, an obligation to indemnify against loss incurred by the lender does not ordinarily permit recovery of estimated future losses. The lender may recover only loss actually incurred by the date of demand. Where the evidence cannot establish the amount of such loss, summary judgment may determine the legal construction of the agreement but the quantification issue must proceed to an enquiry.

The claimant borrowed £2.26 million under a ten-year fixed-rate loan agreement. It repaid the loan early. The defendant, as assignee of the original lender, claimed compensation under an indemnity for losses said to arise from the early repayment, including the loss of contractual interest over the remaining term.

The claimant sought repayment of £200,000 held in escrow. The defendant sought summary judgment for £165,580.92. The central issues were whether the indemnity applied to an early repayment governed by the agreement’s prepayment provisions and whether estimated future losses could be recovered on the evidence available at the summary judgment hearing.

1. Construction. The agreement had to be construed in its commercial context, applying the principles stated by Lord Hoffmann in ICS v West Bromwich Building Society [1998] 1 WLR. The relevant words had to be read as part of the agreement as a whole.
2. Interaction between the clauses. Early redemption was contractually permitted by clause 9 and therefore was not a breach engaging the common law relating to penalties. Clause 6.2 expressly required payment of the indemnity in addition to the fees payable under clause 9. It therefore applied to an early redemption notwithstanding the use of the word repayment.
3. Extent of the indemnity. The words requiring the borrower to indemnify the bank against loss which it incurs referred to loss actually suffered. The indemnity was payable on demand and did not permit a single claim for future losses calculated by assumptions about future interest rates, accelerated receipt or hypothetical re-lending. The defendant was not claiming damages for breach of contract, so the rules concerning assessment of future damages did not govern the indemnity.
4. Summary judgment and quantification. The defendant succeeded in principle on the construction issue, but the evidence did not establish the amount of loss actually incurred by the date of demand. That issue required a further enquiry or hearing. The claimant’s primary construction argument was rejected, but the defendant’s claim for estimated future loss was also rejected.
5. Escrow. The £200,000 was to remain in escrow because the proceedings had not concluded and it remained uncertain whether an amount was presently due. Any application for release was stood over until further evidence had been filed, subject to liberty to apply in connection with mediation.