Indemnity Ineffective if Actual Liability Not Ascertained

If a claim is not defended, is a person indemnifying the defendant required to meet the claim in full?

This question was at the core of a recent legal case involving a property development. The developer contracted with a subcontractor to carry out geophysical work. The subcontractor was taken over in a reorganisation and another affiliated company made an agreement to assume ‘responsibility for the satisfaction, fulfilment and discharge of all of the outstanding Liabilities and Contracts’… and also indemnified the company taken over against all claims etc. in respect of the contract.

Later, the developer made a claim against the subcontractor, alleging breach of contract and negligence. The subcontractor was put into liquidation and consented that the claim made against it (for a sum of £8 million) should be admitted in full. The issue was settled by agreement, not by proceedings in court.

The subcontractor’s liquidators then brought a claim against the company that had given the indemnity, which denied liability. It claimed that the developer first had to prove its claim against the company in liquidation and then, if it were liable, that the settlement was reasonable.

The judge in the Technology and Construction Court concluded that the indemnity included in the takeover agreement was effective. However, the second company was not automatically liable for the agreed sum of damages. In order for it to be bound, the company in liquidation would have to show that it was liable to pay that sum. An appeal was made to the Court of Appeal, which upheld the original decision.