The immediate point arising from Preston Street v. Santander [2012] EWHC 1633 (Ch) is that, if one is drafting an indemnity for recovery on demand of a future loss that may:

  • not flow from a breach of duty; and
  • be difficult to quantify, or be quantified in different ways with different results,

one should consider whether the indemnity should:

  • identify the type of future loss and how to measure it;
  • provide a formula for quantifying the loss – with that formula producing a fixed sum that can be regarded as a claim in debt;
  • allow the claimant to estimate and or certify rates or other inputs used in that formula;
  • permit demand before future losses have become actual; and allow further demands if losses later prove to be greater than the amount originally demanded.

Alexander Hewitt explains.


The dispute in Preston Street was over what losses the assignee of a lender could claim “on demand” under an indemnity against “any loss” “incurred” after a consensual prepayment of a fixed rate loan. If the lender had used a long-form facility agreement to document the loan, the broken funding indemnity might have ended the dispute before it began. The lender’s assignee might then have been able to invoke a formula for calculating its losses that referred to closing out an actual or notional interest rate swap for an amount and period equal to the loan and its fixed rate period.

Instead, the lender had made the loan under a short-form facility letter. The borrower’s consensual prepayment triggered this indemnity:

“In addition to any prepayment costs … the partnership shall indemnify the bank on demand against any … loss … the bank incurs as a result of the repayment of the loan during the fixed rate period …”.

The judge was prepared to construe “repayment” in the quote above as including “prepayment”. He was not prepared, however, to treat the claim under this indemnity as if it were a claim for breach of contract.

Had there been a breach of contract, said the judge, he would have been entitled to award damages for the future losses the lender’s assignee would suffer over the original term of the loan. Broadly, this award would have been for the difference between:

  • the interest the lender’s assignee was likely to receive on redeploying the prepayment over what would have been the remaining term of the loan had it not been prepaid; and
  • the fixed rate interest it would have received had the borrower repaid the loan over its original term.

As this was not a breach of contract case, said the judge, he had instead to construe the particular indemnity before him. And that brief wording only justified a demand for losses:

  • that had actually been suffered; and
  • whose amount was therefore known.

So the lender’s assignee would have to wait until its future broken funding losses became actual, before it could claim them on demand under this indemnity.


For various reasons, Preston Street may not have laid down a universal principle that an indemnity can never validly provide for future losses to be claimed on demand unless it specifies a method for valuing those losses before they become actual. These reasons include:

  • it is a decision of a Deputy High Court judge in a preliminary hearing rather than a full trial;
  • the judge stressed he was only construing the particular clause before him; and
  • the judge seems to have been dissatisfied with the evidence and arguments presented to him in support of the view that the lender’s assignee’s loss was the difference between LIBOR (quoted for a term equal to the balance of the fixed rate period) and the fixed rate.

The facility letter was dated February 2004 and provided for a maximum loan of £2,260,000. One wonders whether the judge would have reached a different conclusion on future losses had he been satisfied that dramatic changes in:

  • capital adequacy regimes and other regulatory requirements; and
  • the lending policies of European banks,

since February 2004 made it reasonable for the lenders’ assignee to calculate its losses by reference to LIBOR for a period equal to the balance of the fixed rate period; rather than by reference to (say) an estimate of its average returns on a representative basket of small to medium ticket lending products for that period.

Law stated as at 27 November 2012.