Rust Consulting Ltd (In Liquidation) v PB Ltd (formerly Kenndy & Donkin Ltd) [2011] EWHC 1622 (TCC)

The Claimant was engaged by a company to provide engineering services for buildings which subsequently sustained substantial damage. The company contended that this was due to negligent advice provided by the Claimant. By this time the Claimant had ceased trading, and its business and assets had been taken over by the Defendant. By way of the asset purchase agreement, the Defendant assumed responsibility for the “satisfaction, fulfilment and discharge” of all outstanding liabilities of the Claimant’s business.

When the company brought a claim against the Claimant, the Claimant went in to liquidation and the Defendant took over the defence. Judgment was entered by consent in favour of the company, and the Claimant sought an indemnity from the Defendant in respect of its liability under that judgment. The Claimant submitted that as the judgment had been entered at the instigation of the Defendant, the Defendant was estopped from challenging the existence and amount of the Claimant’s liability to the company and was required to provide the indemnity sought.

The Court found in favour of the Defendant, stating that the indemnity in the asset purchase agreement did not operate without the Claimant establishing that it was liable to the company for the damages claimed. The Claimant could not recover under the indemnity simply because a judgment by consent had been entered.

Further, the Court held that for an estoppel to arise as contended by the Claimant, the indemnifier had to be notified that a claim was being made under the contract of indemnity, so that the indemnifier was acting in the knowledge or expectation that a claim would be made against him. Knowledge on the part of the indemnifier that a claim had been made against the party entitled to claim under the indemnity would not be sufficient, if he was unaware that he was under an obligation to indemnify, or positively believed that there was no such obligation.

In this case, at no point prior to the entering of the judgment by consent did the Claimant or its liquidators know that there was or might be a right of indemnity under the asset purchase agreement. The concept of estoppel was developed to meet the demands of fairness and justice, and there was nothing unfair about requiring the company to prove its claim.