Indemnity clause

2017 SCMR 1116 SUPREME-COURT-OF-UK Judicial Precedent

Indemnity clauseInterpretation and construction'Indemnity clause subject to a time limit, and triggered only in limited circumstances'

Buyer-company purchased the entire share capital in an insurance brokerage company ("the company") from the seller (defendant)

Agreement made between the parties contained an indemnity clause whereby the seller undertook to pay the buyer an amount equal to the amount required to indemnify the buyer against, inter alia, "all fines, compensation or remedial action or payments imposed on ... the company ... arising out of claims or complaints registered with" inter alia, the Financial Services Authority ("FSA") against the company

Shortly after the purchase the buyer carried out a review of the company which revealed that in many cases the company's telephone operators had misled customers to make a sale

Buyer was obliged to inform the Financial Services Authority, which in turn informed the buyer that customers had been treated unfairly and had suffered detriment

Buyer agreed to compensate the customers affected by the mis-selling

Subsequently buyer made a claim against the seller under the indemnity clause alleging that the company had suffered loss resulting from mis-selling of insurance products in the period prior to the completion of the sale of the company and that the contractual indemnity was not confined to loss arising out of customers' complaints

Seller defended the claim by contending that the circumstances fell outside the scope of indemnity clause as the requirement to compensate which had arisen was not as a result of a claim by the company's customers or a complaint by those customers to the Financial Services Authority or another public authority

Trial Judge construed the indemnity clause as requiring the seller to indemnify the buyer even though there had been no claim or complaint by a customer and accordingly gave judgment for the buyer

Court of Appeal construed the indemnity clause as being confined to losses arising out of customers' claims or complaints and accordingly allowed the seller's appeal

Held, that the indemnity clause was poorly drafted and its meaning was avoidably opaque, therefore it was necessary to adopt an iterative process in order to examine the clause both through a textual analysis of the words in the context of the contract as a whole, and to consider whether the wider relevant factual matrix could provide guidance as to its meaning in light of the commercial effect of rival interpretations

Careful examination of the contractual language identified the circumstances which would trigger the clause

Buyer's suggested construction of the indemnity clause was not correct because it would have the effect that the clause would fail to specify against whom the relevant actions, proceedings and claims could be made; that there must be a limit on who such persons could be as it would be absurd for the buyer to have a claim against the seller for indemnity resulting from any mis-selling on its part before the completion of the sale of the company

Contractual context was also significant in the present case

Mis-selling which the indemnity clause addressed was also covered by the warranties in the Schedule to the agreement between the parties

Scope of indemnity clause, breach of which gave rise to a liability unlimited in time, must be assessed in the context of the detailed and time-limited warranties in the Schedule to the agreement

Buyer had two years after completing the purchase to make a claim under the Schedule covering warranties, which was not an unreasonable time scale

Two years' time provided under the warranties was not an unreasonably short period of time in which to conduct an internal review for any relevant mis-selling/regulatory breaches in order to bring a claim under the warranties; that it was not contrary to business common sense for parties to agree wide-ranging warranties, which were subject to a time limit, and in addition to agree a further indemnity, which was not subject to any such limit but was triggered only in limited circumstances

While the agreement may have become a bad bargain for the buyer, given their failure to bring a claim in time under the warranties, it was not the court's role to construe the indemnity in a way that improved their bargain

Court of Appeal was correct on the meaning of the indemnity clause

Appeal was dismissed in circumstances.

2012 SCMR 1881 SUPREME-COURT-OF-UK Judicial Precedent

Charter-partyIndemnity clauseApplicability and scopeMeasure of indemnityDeterminationBailment, law ofApplicabilityShip in question was time-chartered to the charterers (defendant/respondent)

Charter-party contained a standard form of withdrawal clause entitling the owners (appellants) to withdraw the ship if the hire was not paid when due without prejudice to any claim owners might otherwise have on charterers under the contract

Non-payment of hire by charterers

Withdrawal of ship by her owners

Ship was in the process of being loaded on charterers' instructions/order at time of her withdrawal

Charterers unsuccessfully sought to persuade ship-owners to cancel the withdrawal

Charterers had not made any immediate arrangements to unload/discharge the cargo which was already on the ship, because of which the ship was detained for 2.64 days for discharging the cargo

Ship-owners claimed payment for service of ship and bunkers (fuel) consumed during the 2.64 days on different bases: firstly, on the express terms of an indemnity given in a clause ("indemnity clause") of the charter-party; secondly, under the terms of a new contract made after the withdrawal; thirdly, on the ground of unjust enrichment, and fourthly, under the law of bailment

High Court allowed ship owners' claim only under the law of bailment and rejected all other basis for the claim that were put forward

Court of Appeal allowed the charterers' appeal, rejecting all bases for the claim except for the recovery of the value of bunkers consumed in actually discharging the cargo

Charterers contended that any delay or loss arising from the need to discharge the cargo resulted from the ship-owners' decision to withdraw, therefore they (ship-owners) must bear the adverse as well as the beneficial consequences of an optional decision made in their own interest

Validity

Fact that rather than perform the contract the ship-owners found it more advantageous to exercise an express right of termination was morally and legally neutral

Indemnity clause in the charter-party, which was an employment and indemnity clause that was found in most modern forms of time charter, provided that the charterers indemnified the ship-owners against all consequences or liabilities that might arise from the master complying with the charterers' or their agents' orders

Scope of said indemnity clause was very wide, but it was not unlimited

Said indemnity clause had to be read in the context of the ship-owners' obligations under the charter-party as a whole

Purpose of the indemnity was to protect the ship-owners against losses arising from risks or costs which they had not expressly or implicitly agreed in the charter-party to bear

Question as to what risks or costs the ship-owners had agreed to bear might depend on the construction of other relevant provisions of the contract, or on an informed judgment of the broad range of physical and commercial hazards which were normally incidental to the chartered service, or on some combination of the two

Real question was whether the charterers' order to load the cargo was an effective cause (not necessarily the only one) of the ship-owners having to bear a risk or cost which they had not contractually agreed to bear

Relevant order of the charterers, in the present case, was the order to load the parcel of cargo which was on board the ship when it was withdrawn

Loss claimed by ship-owners was the consequence of such an order

Discharge of cargo in the ship-owners' own time and at their own expense was not an ordinary incident of the chartered service and was not a risk that the ship-owners assumed under the contract

Same arose after the chartered service had come to an end in accordance with the withdrawal clause in the contract (charter-party)

Detention of ship, therefore, fell within indemnity

Regarding measure of indemnity, the time required to remove the cargo was unnecessarily prolonged by the charterers' refusal to recognise the ship-owners' right to withdraw the ship or to make immediate arrangements for the removal of their cargo from a ship that was no longer at their disposal contractually

Ship-owners were entitled to the market rate of hire for 2.64 days and the value of the bunkers consumed during such period

Claim of ship-owners could also succeed at common law as non-contractual bailee of the cargo after withdrawal of the ship

Principles of bailment laid down in the case of China Pacific SA v. Food Corpn of India (The Winson) [1982] AC 939, applied to the present case as, firstly, the cargo was bailed to the ship-owners under a contract which came to an end while the cargo was still in their possession, secondly, as a matter of law the ship-owners' obligation to look after the cargo continued notwithstanding the termination of the charter-party, and thirdly, the only reasonable or practical option open to the ship-owners once the charter-party had come to an end was to retain the cargo until arrangements were made to discharge it

Ship-owners as bailee would be entitled to the bunkers expenses and the opportunity cost of the ship for the period it remained with charterers for discharge of cargo

Regarding claim of ship-owners on basis of a new contract that according to them had been made after the withdrawal of the ship, courts below had rightly held that no such contract had been made on the facts of the case

Claim of ship-owners on basis of unjust enrichment raised larger issues which in the observation of the Supreme Court would be better decided in a case where they arose, and possibly in a less specialised context than a dispute about carriage by sea, therefore, the issue was not addressed

Appeal was allowed and order of High Court was restored accordingly.