Wood v Priestley & Anor

An indemnity clause must be construed by identifying the natural meaning of its words in their documentary, factual and commercial context. An indemnity expressed to cover liabilities of the partners, and claims and proceedings in respect of those liabilities, does not necessarily indemnify an employee against every personal claim arising from employment. A trust-based indemnity is not automatic. Its availability may depend on the outcome of the underlying proceedings, including any findings of breach of trust, dishonesty or fraud.

Andrew Wood, a former salaried partner and insolvency practitioner, sought declarations that the equity partners of Poppleton & Appleby were obliged to indemnify him against claims brought by the liquidators of F W Mason & Sons Ltd and against related investigations. He relied principally on clause 11 of the partnership agreement, and alternatively on a trust said to arise under clause 4.6 in respect of insolvency appointments.

The partners contended that clause 11 covered only partnership liabilities and proceedings against the partnership. They also disputed the immediate availability of any indemnity arising from the trust. The issues were the construction of clause 11, the effect of the settlement agreement, and whether relief could properly be granted before the underlying claims were determined.

1. Clause 11. The claim was dismissed. The words “of the same” in the third element of clause 11 referred back to the liabilities identified in the first two elements. The third element clarified the scope of the indemnity by adding claims, proceedings, costs, demands and expenses relating to those liabilities. It did not create a freestanding indemnity for all claims against Mr Wood personally.
2. The natural meaning of the clause was intelligible and did not justify inserting words limiting the claims to those made against Mr Wood in his capacity as a salaried partner. The court rejected the suggested commercial purpose of providing complete protection against every employment-related claim. Such an indemnity might not appropriately cover, for example, dishonesty, misuse of confidential information or breach of an express instruction.
3. The professional indemnity insurance position did not alter the construction of clause 11. Since no insurer had paid or agreed to pay, the insurance exception did not defeat the claim. Separately, clause 5.2 of the settlement agreement required P&AL to take reasonable steps to ensure that liabilities relating to the claims were the responsibility of an insurer, but breach of that obligation was not decided.
4. The settlement agreement confirmed that clause 11 remained in force. It did not acknowledge or create a liability wider than that clause’s proper construction.
5. The court did not finally determine whether the personal nature of an insolvency appointment was inconsistent with a trust in favour of the employer. An office-holder might hold fees on trust for an employer. However, a right to an indemnity from trust assets was not automatic and depended on findings in the liquidators’ proceedings. It was therefore premature to grant an indemnity.
6. The court distinguished Coulson v News Group, which concerned construction of an express indemnity covering the costs of criminal proceedings and provided little assistance on the present trust issue. The claim was dismissed.