Construction - Indemnity clause
Stornoway 2011 Ltd v SIV Portfolio plc: Queen's Bench Division, Commercial Court (Mr Justice Burton): 14 November 2011
The claimant company was the assignee of another company, C (the manager), which had had an Investment and Funding Management Agreement (the agreement) with the defendant company. The agreement had included an indemnity (the indemnity) to which the manager was entitled in respect of its duties and obligations as manager for the investment portfolio held by the defendant. The agreement also provided for a cap on the indemnity and for certain rules regulating any payment over the cap, the indemnity cap excess payment rules (the rules). The agreement also provided for payment within a 12-month period. In August 2007, the defendant collapsed and entered receivership. The manager, it was alleged, had incurred some $3.5m of legal costs in proceedings brought by another bank against the defendant. The claimant claimed for those costs under the indemnity.
The issues were whether: (i) the indemnity was capped in the sum of $1m for the relevant periods, with the effect that, insofar as the sum claimed exceeded that $1m, the balance was an indemnity cap excess; (ii) if the indemnity was capped, at what point did the initial 12-month period commence for the purposes of the indemnity; and (iii) if the indemnity was capped, whether the indemnity covered one 12-month period or more than one 12-month period.
The court ruled: (1) It was well established that a court should not adopt a construction if it flouted business common sense, and that, if there were ambiguity, and two alternative constructions were available, the court should choose the more commercially sensible of the two (see  of the judgment).
In the instant case, the indemnity was subject to the indemnity cap in addition to the rules. The manager had been expressly made subject to the rules, and had, thereby, been made subject to the cap and, consequently, to the provisions for payment of any excess over the cap (see  of the judgment). Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios  3 All ER 229 followed; HHY Luxembourg SARL v Barclays Bank plc  All ER (D) 214 (Oct) followed; Ravennavi SpA v New Century Shipbuilding Co Ltd  All ER (D) 89 (Feb) considered; Multi-Link Leisure Developments Ltd v North Lanarkshire Council  1 All ER 175 considered.
(2) The 12-month period began to run from when a quantified demand was made. That clearly followed from the defendant's obligation under the agreement to pay the manager, on demand, an amount equal to any loss that arose from its appointment or the performance of its duties. What triggered the obligation could only be the quantification of the loss, which had to be met on demand by payment of an amount equal to such loss. The demands in the instant case had been made in those circumstances in June, November and December 2010. Thus the 12-month period had first started to run from June 2010 (see  of the judgment).
(3) The 12-month period was rolling, that no more than $1m was payable in respect of any 12-month period. There was an express provision for a cap on $1m within any 12-month period. There was also an express provision that such a 12-month period was to be measured on a rolling basis. The use of that wording made it quite clear that that was not a provision for consecutive 12-month periods, but for measurement retrospectively on every date of the effect over a previous 12-month period (see  of the judgment).
Dominic Chambers QC (instructed by Reynolds Porter Chamberlain LLP) for the claimant; Barry Isaacs QC (instructed by Hogan Lovells) for the defendant.