Factual and Procedural Background
The Plaintiff is a factor which purchased the debts of its client, Company A, pursuant to an Agreement dated 30 June 2003. The Defendants were directors of Company A and each entered into a deed of indemnity with the Plaintiff between May 2007 and December 2008. Company A entered administration in May 2009, and many debts were disputed. After a specialist collection process lasting about two years, the administrators acknowledged in writing that Company A owed the Plaintiff £8,924,783.
In April 2012, the Plaintiff commenced proceedings to recover that sum from the Defendants under the deeds of indemnity. The Defendants denied liability on several grounds, including that their liability was secondary and discharged by material variations to the Agreement, that the Plaintiff failed to properly collect and enforce debts, and that the Plaintiff was estopped from relying on strict rights under the Agreement for debts notified after 24 February 2009.
In November 2013, the Plaintiff applied for summary judgment on several construction and legal issues, no longer pursuing a money judgment at that stage due to the discovery of credit insurance indemnifying some losses. The issues for summary judgment focus on the nature of the Defendants’ liability and the interpretation of contractual terms.
Legal Issues Presented
- Whether the deeds of indemnity impose primary liability on the Defendants or secondary liability akin to guarantees.
- Whether the deeds of indemnity were discharged by subsequent material variations of the Agreement.
- Whether personal guarantees executed in December 2008 substituted the deeds of indemnity for the first and second Defendants.
- Whether proofs of delivery constitute "Financial Records" under the Agreement.
- Whether the Plaintiff failed to properly collect the debts and enforce them, affecting the Defendants’ liability.
Arguments of the Parties
Plaintiff's Arguments
- The deeds of indemnity impose a primary liability on the Defendants, not a secondary guarantee, supported by the language of indemnification and the conclusive evidence clause.
- The Defendants’ liability is independent of the company’s liability, as demonstrated by the ability to rely on certificates of indebtedness as conclusive evidence.
- Material variations to the Agreement do not discharge the Defendants’ liability, particularly as the first and second Defendants consented to those variations and the third Defendant signed after them.
- Proofs of delivery fall within the definition of Financial Records, and the company breached obligations by failing to produce them.
- The Plaintiff was under no duty to mitigate losses; collection of debts was at its absolute discretion, and failure to collect does not provide a defence under the indemnity.
- Certificates of indebtedness issued by the Plaintiff are conclusive as to quantum unless there is a manifest error, which the Defendants cannot demonstrate without extensive investigation.
Defendants' Arguments
- Their liability is secondary and discharged by material variations to the Agreement under the rule in Holme v Brunskill.
- The deeds of indemnity were replaced or supplemented by personal guarantees executed in December 2008, at least for the first and second Defendants.
- Proofs of delivery do not constitute Financial Records or were not required to exist, limiting the Plaintiff’s claims.
- The Plaintiff failed to properly collect debts, and some debtor disputes were spurious, amounting to failure to mitigate or causation of loss by the Plaintiff.
- There is a manifest error in the certificates of indebtedness, as the Defendants cannot conclusively demonstrate the amounts certified without a full investigation, which should preclude summary judgment.
- The third Defendant should not be liable retrospectively for losses on invoices notified before he signed his deed of indemnity.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Holme v Brunskill (1878) 3 QBD 495 |
Rule that material variations to a guarantee discharge the surety unless consented to. |
Defendants relied on this rule to argue discharge; court held it did not apply as liability was primary and variations consented to. |
| IIG Capital LLC v Van Der Merwe [2008] EWCA Civ 542; [2008] 2 Lloyd's Rep 187 |
Distinction between primary and secondary liability; conclusive evidence clause effect. |
Court relied on this case to hold deeds of indemnity imposed primary liability and conclusive evidence clauses barred Defendants from relying on company defences. |
| Close Invoice Finance Limited v Korpal (unrep. 22 September 2009) |
Application of conclusive evidence clause to preclude challenge to liability and quantum. |
Followed IIG to support primary liability and conclusiveness of certificates. |
| Vossloh AG v Alpha Trains (UK) Limited [2010] EWHC 2443; [2011] 2 All ER (Comm) 307 |
Whether conclusive evidence clause converts guarantee into performance bond. |
Court found it did not; however, this case was not considered helpful to Defendants here. |
| North Shore Ventures Ltd v Anstead Holdings Inc [2011] EWCA Civ 230; [2012] Ch 31 |
Effect of conclusive evidence clause and manifest error; whether variations affect conclusive certificates. |
Court considered manifest error and concluded obligations were primary; dicta supported Plaintiff’s position on conclusive certificates. |
| Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643 |
Principles on manifest error and effect on guarantees. |
Referenced in discussion of manifest error and conclusive evidence clauses. |
| Re Charge Card Services Ltd [1987] 1 Ch 150 |
Running account principle for reciprocal obligations. |
Applied to conclude losses are assessed on ultimate balance, relevant for timing of loss under indemnity. |
| Royscot Commercial Leasing Ltd v Ismail (29 April 1993) |
Mitigation does not apply under contracts of indemnity. |
Supported Plaintiff’s argument that failure to mitigate is not a defence under indemnity. |
| Codemasters Software v Automobile Club de L'Ouest [2009] EWHC 3194; [2010] FSR 13 |
Mitigation principles under indemnity contracts. |
Confirmed mitigation is not a defence under indemnity claims. |
Court's Reasoning and Analysis
The court began by examining the nature of the deeds of indemnity, concluding that they impose primary liability on the Defendants rather than secondary liability akin to guarantees. This conclusion was based on the explicit language of indemnification in the deeds, the conclusive evidence clause binding the Defendants to certificates of indebtedness, and the inclusion of contingent liabilities within the scope of the indemnity. The court relied heavily on the Court of Appeal’s decision in IIG Capital LLC v Van Der Merwe, which held that similar language rebutted the presumption of secondary liability and precluded Defendants from relying on defences available to the principal debtor.
The court rejected the Defendants’ reliance on Holme v Brunskill and other authorities that material variations discharged their liability, finding that the Defendants either consented to the variations or were bound by primary liability, making the rule inapplicable.
Regarding the personal guarantees executed in December 2008, the court held that these did not affect the third Defendant’s liability under his deed of indemnity, as he signed after those guarantees were given.
On the issue of proofs of delivery, the court found that these documents fall within the definition of Financial Records under the Agreement. The Defendants’ argument that the obligation was limited to existing documents was rejected, as Special Condition 12 required the company to obtain and retain such proofs. The company’s failure to produce them constituted a breach.
With respect to the Defendants’ contention that the Plaintiff failed to collect debts or mitigate losses, the court held that the Plaintiff had discretion under the Agreement to decide how to enforce debts, and failure to collect does not constitute a defence under a contract of indemnity. The court emphasized that mitigation principles do not apply to indemnity claims.
The conclusive evidence clause was considered decisive. The court held that certificates of indebtedness issued by the Plaintiff are binding on the Defendants unless there is a manifest error, defined as an obvious or easily demonstrable error without extensive investigation. The Defendants’ allegations of errors requiring full trial investigation did not meet this threshold, rendering their defence without real prospect of success.
The court further held that the third Defendant’s liability was not retrospective, as losses under the running account Agreement arise when the Plaintiff suffers loss, which occurred after the third Defendant signed his deed.
In summary, the court found that the Defendants’ defences lacked real prospect of success, and the Plaintiff was entitled to summary judgment on the legal issues presented.
Holding and Implications
The court granted summary judgment in favor of the Plaintiff on the issues of construction and law raised in the application. The Defendants’ defences concerning the nature of their liability, discharge by variations, status of personal guarantees, classification of proofs of delivery, and the effect of the conclusive evidence clause were all rejected as having no real prospect of success at trial.
The direct effect is that the Plaintiff’s claims under the deeds of indemnity stand on a primary liability basis, and the Defendants cannot rely on company defences or alleged procedural failings by the Plaintiff in debt collection to avoid liability. No broader precedent was established beyond the application of established principles regarding indemnity contracts, conclusive evidence clauses, and mitigation.