Indemnities - Durley House Ltd v Firmdale Hotels plc

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Summary: A money judgment was made against an indemnifier under an indemnity to a tenant in respect of rent under a lease even though the indemnified tenant had not paid the relevant rent to the landlord.

A money judgment was made against an indemnifier under an indemnity to a tenant in respect of rent under a lease even though the indemnified tenant had not paid the relevant rent to the landlord.

Background

Durley House Ltd (“D”) was the tenant under a lease of a property called Durley House, Sloane Street, London and Viscount Cadogan and Cadogan Estates Ltd (“C”) was the landlord. By a management agreement (the “Management Agreement”) Firmdale Hotels plc (“F”) agreed to manage the property. Under the terms of the Management Agreement, F was under an obligation to pay the rent under the lease, bear all operating expenses (including rent) and indemnify and keep indemnified D against all such expenses. The lease terminated towards the end of 2012 and D gave up possession owing a very substantial amount of rent, including rent the subject of the Management Agreement (the “Rent”). A settlement agreement entered into between D and C on 24 July 2013 (the “Settlement Agreement”) provided for the payment over to C by D of D’s ‘net recovery’ in proceedings against F, in return for the discharge of D’s existing liabilities to C. In a previous judgment, the court found F liable for the Rent and the current proceedings concerned the appropriate order.

F submitted that the effect of the Settlement Agreement was that D had been released from all liability for the Rent under the lease. Thus D had no rental liability against which it required to be indemnified by F and had no relevant loss to support a claim for damages.

Regarding the indemnity, F argued that since D had not paid the rent to C, then, as a matter of law, it could not claim damages from F for breach of the contract of indemnity. Payment by D to C was a pre-condition to establishing F’s liability to pay D.

Decision

Stephen Morris QC sitting as a deputy High Court judge in the Chancery Division held that:

  1. applying Mobil North Sea Ltd v PJP Pipe and Valve Co [2001] 2 All ER (Comm) 289, properly construed, the terms of the Settlement Agreement did not release or discharge D from liability to C for the Rent for the purposes of the indemnity.
  2.  the position in equity was as follows. The indemnified is entitled to a remedy from the indemnifier, even if the indemnified had not paid the creditor. The court was satisfied that in the present case equity would have ordered, and the court could order, payment by the indemnifier to the indemnified and that it was no concern to F to ensure that payment was passed on to C.

BLP comment:

"The moral for draftsmen seems to be that, absent specific drafting to the contrary, an indemnity may entitle the indemnified party to payment even before it has paid the relevant debt to the third party creditor."

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