Cover me! I’m going in(demnity)

Introduction

This article considers the role of a claim for an indemnity in professional negligence claims. We ask what lessons can be drawn from the authorities about the nature and limits of a claim for an indemnity, when it can be useful or appropriate, and how should it be used.

What is a claim for an indemnity?

An indemnity in this context might more precisely be described as a claim for a declaration as to the damages that a defendant should pay a claimant in respect of loss that may be incurred which can include liabilities to third parties. It is a form of relief that describes without quantifying a defendant’s liabilities. This contrasts with a money judgment – by far the most usual relief in professional negligence claims – which crystallises and quantifies the defendant’s liabilities into a judgment debt. We are dealing in this article with claims concerning damage caused by professional negligence, rather than other claims which have similar labels but are conceptually different, such as claims under a contract of indemnity.

Why do we need to claim an indemnity?

The need for declarations of indemnity arises for two reasons. First, there is the problem of certainty. It is occasionally clear at the point of issue or at trial that the claimant has suffered, is suffering or may suffer substantial losses that have not crystallised or are not yet capable of quantification and are therefore too uncertain. That uncertainty may relate to whether the loss will be suffered, the precise form it will take, or quantum. The uncertainty creates a challenge for the court when seeking make an appropriate award by way of a money judgment. The presence of such uncertainty at the expiry of a limitation period may make the need to proceed acute.

Second, there is the general rule that “damages for all prospective loss flowing from a single cause of action must be recovered once and for all in one action”[i]. Claimants cannot leave uncertain losses for future proceedings, nor can they wait indefinitely for their potential losses to crystallise because of limitation. Any attempt to bring a second claim for further damages arising out of the same negligence will of course be met with Henderson v. Henderson abuse arguments.

Claiming a declaration that the defendant must indemnify the claimant is a solution to the problem faced by a claimant who must claim some prospective loss but cannot plead it with sufficient certainty.

This situation can arise in innumerable factual scenarios. We recently acted for a developer claimant in a claim against solicitors acting on a transaction to purchase land. The developer had been the victim of an imposter fraud; it had bought (or so it thought) a property from an intermediary but the intermediary had bought from a fraudster impersonating the true owner. The claim was based on P&P/Dreamvar principles. The claimant had, prior to learning of the underlying fraud, carried out certain building works to the property. As a result the claimant faced a substantial claim for damages for trespass brought by the true owner. The problem on loss was that the quantum of the trespass claim was disputed and would not be resolved before the trial of the claimant’s claim against the solicitors. This was a good example of a common category of indemnity claims; where the professional’s negligence has exposed their client to legal proceedings brought by a third party and therefore a potentially substantial liability to that third party[ii].

What are the limits of an indemnity claim?

A claimant often will not know, with full certainty, all the losses it has suffered as a result of professional negligence when they need to bring a claim. In those circumstances, one might think that best practice requires the inclusion of a catch-all head of claim for (say) “a declaration that the defendant is liable to indemnify the claimant for all and any other losses arising as a result of the said breach”. However, this would be an inadequate pleading and liable to be struck out. It fails to give acceptable particulars of the loss that has been suffered.

There are other principles which serve to limit the scope of potential claims for an indemnity. All the usual limitations on recovery apply: causation, remoteness, scope of duty, mitigation. A claim for an indemnity in respect of a liability that has been incurred will not succeed if it is “clear and certain” that the liability will in fact never be discharged by the claimant[iii]. A claim for an indemnity in respect of a particular loss might be dismissed if the likelihood of the loss occurring is too speculative/uncertain, as distinct from uncertainty around quantification[iv]. There are specific regimes to resolve the difficulties of quantifying specific types of uncertain future loss, for example claims for loss of earnings. Where such regimes exist a claim for an indemnity will not be appropriate.

Final declaration or postponement of assessment?

An often keenly disputed question that arises will be whether the court makes the declaration of indemnity sought at trial or postpones determining the issue of quantification to a specified future date when the uncertainty has been resolved. Often, indemnity will favour a claimant because it reduces the range of arguments available to defendants and decreases the obstacles to recovery if the loss is suffered. There are contrasting approaches taken to deciding between declaration and postponement in the authorities.

In Household Machines v. Cosmos Exporters [1947] 1 KB 217 at 219-220, on a counterclaim by the buyers of undelivered goods, Lewis J granted a “declaration of indemnity limited to such damages as might be found to be legally due from the defendants to a subsequent purchaser as a result of the non-delivery by the plaintiffs”. In Trans Trust v. Danubian Trading [1952] 2 QB 297 the Court of Appeal took a different approach in relation to claims against a buyer in respect of sums that might be owed to the seller’s seller. The judge had granted a declaration. Somervell LJ accepted at 303 that “[t]here may be some cases in which the court can state a principle which makes the subsequent quantification of this damage simple” but pointed out that difficult questions could arise, such as contractual variations or issues of mitigation. He expressed the concern that “[n]o declarations ought to prejudice or preclude a proper determination of these issues” and suggested that it could “be more satisfactory if there were liberty to apply for directions as to the determination of these issues, if any, and quantification of damages … should disputes arise. Denning LJ expressed himself in more forthright terms at 307: “If the liability of the sellers to a third party were within the contemplation of the parties, but had not yet been assessed, then the proper course for the judge was to reserve that head of damages”.[v]

The comments in Trans Trust, which were obiter, have been the subject some judicial criticism for going too far in outlawing declarations, in particular by McNair J in British Electrical v. Patley Pressings [1953] 1 WLR 280[vi]. Such criticism may have been an overreaction, because the Cosmos and Trans Trust approaches can probably be reconciled on the basis that some future quantifications are simpler than others. As a matter of practicality, though, it will not be difficult for the party pressing for postponement to raise a potential difficult issue, or issues, that a declaration would prejudice.

More recently, Deeny v. Gooda Walker [1995] 1 WLR 1206 involved claims by Lloyd’s Names against managing agents/underwriters for potential liability to policyholders. Philips J rejected the submission that the court lacked jurisdiction to follow the Trans Trust approach[vii]. While noting that “[t]he desirability of bringing an end to litigation will normally make it appropriate for the court to make a single award of damages which includes the best assessment possible of future loss”, he chose to postpone the assessment on the basis that “special features” of the Lloyd’s litigation “justify this exceptional course”[viii].

The authors of McGregor on Damages (22^nd ed) have discerned “a somewhat greater preparedness generally to postpone the adjudication on issues of damages”[ix] but the authorities still go both ways. For example, Browning v. Brachers [2004] EWHC 16 (QB); [2004] PNLR 28 was a bungled litigation claim where the costs order against the claimant had never been enforced, and Jack J made a declaration of indemnity[x]. A similar order had been made in Hunter v. Earnshaw [2001] PNLR 42 by Garland J[xi]. On the other hand, in Markel International v. Surety Guarantee [2008] EWHC 3087 (Comm) Teare J made a declaration of indemnity for reasonable settlements of claims under certain bonds (which was not disputed), but refused to make a declaration that it would be reasonable to settle all claims for 100 percent of the claim value[xii].

Practical tips

In cases like this, consideration needs to be given to whether an indemnity or postponement is suitable and which is more appropriate. This will depend on factors such as:

• the nature of the loss and when it might be incurred (if at all);
• the potential issues or challenges that might conceivably arise (for example, issues regarding mitigation feature prominently in the authorities);
• how narrowly and simply a declaration of indemnity might be drafted;
• the potential costs of arguing over indemnity or postponement, and the potential costs savings if agreement can be reached as to the approach; and
• the benefit of an indemnity in terms of certainty against the disadvantages for a defendant.

It is sensible to consider this at an early stage. If seeking postponement is likely to be preferred, that question should be addressed at an early stage because it will impact the approach to the early stages of the litigation. At the latest it should be addressed at the first costs and case management conference as it should be reflected in any cost budgeting. This enables the parties to consider what they need to deal with at trial, and what might be left out.  This in turn will impact Part 18 requests, disclosure, witness statements and expert evidence.

Identifying the arguments for and against indemnity or postponement will also enable legal teams to think creatively.  For example:

• If the claimant has only suffered potential losses, could the claim be warehoused so that the litigation is avoided altogether, perhaps through a standstill agreement or a stay? What reasons might there be not to delay determination of the whole dispute, perhaps due to the risk of losing valuable witness or documentary evidence.
• If a claimant is anxious to avoid postponement, is there a way of bringing the other proceedings to a head? Perhaps the claimant could proactively claim a ‘nil liability’ declaration against the third party instead of simply waiting to be served with proceedings, or seek pre-action settlement with the third party, preferably with the co-operation and engagement of the defendant.
• Can the issue be used to add costs pressure? If the claimant is not confident in relation to liability, for instance, they might agree to postponement in order to reduce their potential costs exposure.

Article by Brie Stevens-Hoare KC and Jack Dillon

[i] Chitty on Contracts (33^rd ed), 30-013.

[ii] Other examples of indemnities in the (slightly more dated) cases include indemnities for the liabilities owed to a manager who was employed for a restaurant that was not permitted to trade in Transportation Agency v. Jenkins (1972) 223 E.G. 1101 and for the future liability of a vendor to their purchaser for failing to sell with vacant possession in Rumsey v. Owen White & Catlin (1978) 245 E.G. 225.

[iii] McGregor (cited above), 11-031, citing Biffa Waste Services v. Maschinenfabrik [2008] EWCA Civ 1257; [2009] QB 725.

[iv] Adan v. Securicor Custodial Services Ltd [2004] EWHC 394 (QB); [2005] PIQR P6, Eady J at [23].

[v] Romer LJ agreed with both, at p307.

[vi] At 284. McNair J commented: “I confess humbly, with respect, to some difficulty in understanding fully the limitations imposed by that judgment upon a judge of first instance in making declarations of this nature which, so far as my experience goes, have been granted more or less as a matter of form in the case of this sort of contract.”

[vii] At p1212f-1214a. It is worth noting the House of Lords dicta cited in support of the argument against jurisdiction: Murphy v. Stone-Wallwork (Charlton) [1969] 1 WLR 1023, Lord Pearce at 1027; Mulholland v. Mitchell [1971] AC 666, Lord Hodson at 674.

[viii] At p1214b-e.

[ix] At 11-033.

[x] At [98]-[99]. Neither side had proposed postponement.

[xi] At [25].

[xii] At [8]-[9].