Durley House Ltd v Firmdale Hotels Plc

This case concerns the liability of Firmdale Hotels plc, the Defendant, pursuant to agreements it made with Durley House Limited, the Claimant, to pay for rent due under a lease made between the Claimant as tenant and a third party, the Lessor, for a lease of property known as Durley House, 115/116 Sloane Street, London SW1X 9PJ ("the Property"). The Lessor under the lease was the Honourable Charles Cadogan and Cadogan Estates Limited.

On 23 December 2013, I handed down the main judgment in this case (the "Main Judgment"). This judgment addresses matters consequential upon the Main Judgment. I use the same definitions of terms as in the Main Judgment.

In the Main Judgment, I concluded, inter alia, that, as a matter of construction of the 2000 Management Agreement and, in particular, of clauses 7.2.2. and 8, the Defendant (as well as another company, SSHM), are liable for rent under the Lease in respect of periods within the Operating Term, including rent which is determined and falls due after the expiry of the Operating Term: see Main Judgment §§271, second point, and 209. The relevant outstanding rent under the Lease for the period up to 19 January 2009 amounts to £932,386.88 ("the Relevant Rent"). I further concluded that the Defendant is not liable for rent under the Lease or for management feesin respect of any period after 19 January 2009 (§220) and that the Defendant's counterclaim against the Claimant in respect of contribution to the costs of the 2000 rent review succeeds to the extent of £170,963.11 (§270).

At §272, I invited submissions as to the appropriate orders to be made consequential upon my conclusions and in particular on the issue whether it is appropriate for there to be any money judgment in respect of the Relevant Rent. I noted, at §9, that it appeared that the Claimant itself had not paid to the Lessor the relevant sums. Thus, whilst prepared to grant declarations to reflect my conclusion on the issue of construction, I was not at that stage satisfied that it was necessarily appropriate to order the Defendant to pay any sums.

As matters have developed, the issues which now fall for decision are as follows:

Following judgment, on around 13 January 2014, the parties made some initial written submissions. The Claimant contended that it is entitled to judgment for the Relevant Rent, that this was an entitlement to damages for breach of contract, and that whether the Claimant has paid it to the Lessor is irrelevant, citing Total Liban SA v Vitol Energy SA [2001] QB 643 in turn citing a passage from the speech of Lord Goff in Firma C-Trade SA v Newcastle Protection and Indemnity Association (The Fanti) [1991] 2 AC 1 at 35-36. The Defendant contended that the Claimant is only entitled to the Relevant Rent once it has paid the Lessor. Prior to payment to the Lessor, the Claimant is entitled at most to a declaration of entitlement to indemnity. Clause 7.2.2. of the Management Agreement imposes an obligation upon the Defendant to pay the Lessor, not the Claimant, and clause 8 is merely an indemnity.

In the light of these submissions, I decided to hold a further oral hearing and on 28 January 2014 sent a note to the parties seeking clarification of their respective cases, particularly on the Money Judgment issue. I asked for confirmation that the Relevant Rent had not been paid to the Lessor, whether the Lessor was still pressing the Claimant for payment of the Rent and whether there was any prospect of payment being made by the Claimant to the Lessor. I further asked the Claimant to clarify the legal basis of its claim for payment of the Relevant Rent, whether the Claimant's claim was a claim for payment of a contractually due sum (debt) or a claim for damages for breach of contract; and in either event under which contractual provisions in the Management Agreement and/or in the Licence such claim arose, and for submissions on the law relating to contracts of indemnity.

The oral hearing on these issues was fixed for 17 March 2014. By submissions dated 12 March 2014, the Defendant responded in writing to my note. On the Friday before that hearing, 14 March 2014, the Claimant served further substantial written submissions. More significantly, in response to my inquiry as to the prospect of the Claimant paying the Relevant Rent to the Lessor, the Claimant disclosed to the Court and to the Defendant, for the first time, the existence and terms of a settlement agreement which had been entered into between the Claimant and the Lessor on 24 July 2013 ("the Settlement Agreement"). I refer to the terms of the Settlement Agreement in detail below. In short, the Settlement Agreement provided for the payment over to the Lessor by the Claimant of the Claimant's "net recovery" in the present proceedings, in return for the discharge of the Claimant's existing liabilities to the Lessor. In its further submissions, the Claimant relied upon the terms of the Settlement Agreement as evidence that if the Court were to order payment to it of the Relevant Rent, that would then be paid over to the Lessor.

The further oral hearing on these matters took place on 17 March and was completed on 4 April. In total, more than 30 further authorities were cited in argument. At the hearing on 4 April, the Claimant produced a yet further version of its draft amended Particulars of Claim for which it seeks permission, if needed.

As recorded in the Main Judgment, the Lease terminated toward the end of 2012 and the Claimant vacated possession owing a very substantial amount of rent. A statutory demand for the rent was served on 28 September 2012. In addition to the Relevant Rent, the Claimant owed the Lessor further sums in excess of £1,167,613. Towards the end of October 2012, the Lessor brought proceedings against the Claimant in the West London County Court ("the Possession Action") claiming possession of the Property and an order for payment of the then outstanding rent, damages for use and occupation and interest. As a result the Lease was forfeited. On 28 November 2012 the Lessor obtained judgment in those proceedings ("the Possession Action Order"), for arrears of rent in the sum of £2,129,830, damage for use and occupation at a rate of just under £1000 per day, and interest in the sum of £46,700.71 and continuing interest at the rate of £148.54 per day until possession is given. This judgment has not been satisfied and sums due under the Possession Action Order remain outstanding. The Claimant's only asset was the Lease. The Claimant is now insolvent. The Lessor obtained possession of the Property on 7 January 2013.

The Claimant submits as follows:

The Defendant submits as follows:

These submissions gave rise to the following issues:

Clause 7.2.2 of the 2000 Management Agreement (§55 Main Judgment) imposes a contractual obligation upon the Defendant, owed to the Claimant, to pay rent under the Lease to the Lessor.

Clause 8 of the 2000 Management Agreement (§56 Main Judgment) imposes two obligations, owed to the Claimant: first, to "bear" all operating expenses (including but not limited to "rent") and secondly, to indemnify and keep indemnified the Claimant against all such expenses. It is arguable that the obligation to "bear" expenses, imposes an obligation upon the Defendant to pay third parties directly (as in the case of Clause 7.2.2 above).

As regards clause 6 of the Licence (§67 Main Judgment), there are three possible relevant obligations. Clause 6.1 itself imposes two obligations, owed to the Claimant. First, an obligation upon the Defendant to pay sums payable under the Management Agreement (thus including rent under Clause 7.2.2.) if SSHM defaults in paying those sums. Secondly, an obligation upon the Defendant to indemnify the Claimant against "all liability, damage, or loss awards of damages or compensation penalties costs disbursements and expenses resulting from" SSHM's breach of the 2000 Management Agreement e.g. including SSHM's failure to pay rent under the Lease. Thus, that which is to be indemnified against is very widely framed. The third possible obligation arises from the opening words of clause 6. The Claimant contends that by those words, and in particular the words "as a primary obligation", the Defendant undertook an obligation to ensure that SSHM complied with its obligations (a "see to it" obligation as per Moschi v Lep Air Services Ltd [1973] AC 331). By contrast, it is arguable, that, by those words, the Defendant continued itself to be obliged, as primary obligor, to pay sums payable under the 2000 Management Agreement (including the obligation to pay rent under the Lease under clause 7.2.2), even where SSHM was not in default. Put this way, this merely indicates that, effectively, the Defendant itself remained itself bound by the terms of the 2000 Management Agreement including clause 7.2.2), following the assignment to, and regardless of any default by, SSHM. In this way, this part of clause 6 adds little if anything to the obligations in clause 7.2.2 and 8 of the 2000 Management Agreement.

In the Part 8 claim form dated 4 July 2012, the Claimant sought a declaration that the Defendant is liable to pay the Claimant the Relevant Rent and an order that the Defendant pay the Relevant Rent to the Claimant. In the Particulars of Claim, served on 16 November 2012 once the proceedings had been converted to a Part 7 claim, the Claimant alleged merely that "the Defendant is liable to pay the balance of the amounts due after review" and claimed, in the prayer for relief, simply the amount of Relevant Rent. Despite a request for further information, no further explanation of the basis of that liability to pay was provided. Following questions raised in my note, the Claimant's claim as now advanced is as follows.

First, the Defendant should pay to the Claimant the Relevant Rent as damages for breach of contract (and not as a contractual sum due). The breach or breaches of contract relied upon are:

As an alternative, if it is unable to claim damages for breach of the contract, as above, the Claimant seeks an order that the Defendant pay the Relevant Rent directly to the Lessor, by way of an order for specific performance. Specific performance is sought either of the Defendant's obligation (under clause 7.2.2. and perhaps clause 8, of the 2000 Management Agreement, and of its obligation under Clause 6.1 of the Licence), to pay the rent under the Lease directly to the Lessor, or, alternative, as an equitable remedy for the breaches of the contract of indemnity in clause 8 of the Management Agreement and in clause 6.1 of the Licence. Specific performance of the obligation in the opening words of clause 6 of the Licence is not sought.

Since I raised this issue in January, the Claimant's proposed amendments to its Particulars of Claim have undergone a number of changes. In the final draft amended Particulars of Claim, the Claimant introduces the following allegations:

The Claimant submits, first, that amendment is not strictly necessary, although it accepts that formulation of the claim for payment in clearer terms now is "a good idea". In this regard, the Claimant refers to the provisions of CPR 16.2(1)(b) and 16.2(5) and 16.4. Secondly, if required, amendment should be allowed: the amendments cause no additional costs, require no additional evidence and serve the overriding objective of doing justice. The considerations which led Warren J to allow a very late amendment in Amin v Amin [2009] EWHC 3356 (Ch) at §353 apply equally in the present case. Thirdly, the Defendant has always known that the Claimant was seeking a money judgment for the Relevant Rent and had every opportunity to prepare the entire case, including this aspect. Fourthly, the Defendant raised no objections at the trial as to the way the claim for payment had been formulated.

The Defendant submits that permission to amend is required and should be refused. First, in a claim based on contract, the claimant must plead details of the relevant breach, causation, loss and the relief sought. Under CPR 16.4(1), the Defendant must know the case it has to meet. Specific performance must be pleaded.

Secondly, the application to amend has been made very late in the day, after the long course of the litigation, at the last minute, and despite the point being drawn to the Claimant's attention in the Main Judgment and in my note. It is also being sought after judgment has been given. Indeed right up the last day of the hearing, the amendments sought remained unclear.

Thirdly in effect the amendments constitute a new case and a new claim and furthermore the amendments should be treated as if applied for after the limitation period had expired. The effect of the Settlement Agreement is that, after judgment, the Claimant will have no liability to the Lessor and thus, post final determination of this claim, the Claimant would have no cause of action against the Defendant. The effect of allowing the amendment would be to revive the cause of action. (This argument depends on the true construction of the Settlement Agreement. On the basis of my conclusions below, at the time of seeking the amendment, the Claimant still has a liability to the Lessor).

Fourthly, prejudice is no longer relevant. Under CPR 1.1 and 1.1(2), the Court has to ensure that disputes are dealt with expeditiously and fairly and should only take up an appropriate share of the Courts' resources. In the present case, court resources have been taken up and other court users have been inconvenienced.

Fifthly, in any event, the Claimant has suffered prejudice. The loss was not explored in evidence. The trial would have taken a different course and the Defendant may have sought to settle. The Defendant had no opportunity to explore issues in cross-examination; for example, in relation to the handling of the 2007 rent review. Had it been properly pleaded, the Defendant would have been able to deal with these issues and arguments at trial. Failure to do so led to the need for substantial additional submissions and hearings. The Defendant has been "mucked about" and further costs have been incurred.

Finally, the amendment has little prospect of success. The Settlement Agreement has ended the Claimant's liability for rent and the outcome of the proceedings no longer affects the Claimant, as it suffers no loss.

The Defendant also complains about the late disclosure of the Settlement Agreement, which should have been disclosed at the trial in July 2013. If it had been disclosed earlier, the Defendant would have approached this litigation differently and in terms of settlement, as the Defendant would have known that it is the Lessor who had the right to control or determine whether there would be a settlement. The Defendant could have explored what loss was actually suffered and what benefit there was in the Claimant bringing this in claim. The Defendant could have cross- examined on the issue of benefit to the Lessor from its interest being accelerated.

CPR 16.2 provides for the contents of the claim form as follows:

The White Book Service 2014 Vol. 1 states at §16.4.1 that the primary function of the particulars of claim is to state concisely the facts on which the claim relies. The claimant should state all the facts necessary for formulating a complete cause of action. A claimant may also.. refer .... to any point of law on which their claim is based. Practice Direction 16, referred to at CPR 16.4(1)(e), does not specify any particular matters which require to be pleaded in a claim of the present sort.

The principles to be applied in considering a late application to amend pleadings are to be found largely in two Court of Appeal decisions: Swain-Mason v Mills & Reeve LLP: Practice Note [2011] EWCA Civ 14 [2011] 1 WLR 2735 and in particular the judgment of Lloyd LJ at §§68 to 74, 106 to 107, citing the judgment of the Court of Appeal in Worldwide Corpn Ltd v GPT Ltd (unreported) 2 December 1998. I have also been referred to two first instance decisions: Amin v Amin [2009] EWHC 3356 (Ch) at §§347-353 and Dany Lions Limited v Bristol Cars Limited [2014] EWHC 928 (QB). In summary:

It is also noteworthy that in those cases where the late amendment was refused, the amendment sought was based on new factual or expert evidence - which would either cause an adjournment or require the opposing party to adduce evidence in response or cause trial to be delayed (Worldwide cited by Swain-Mason at §70): see Dany Lions and Swain-Mason. By contrast, in Amin v Amin at §§347-353 a very late amendment was allowed where no additional costs were incurred and no additional evidence necessary.

First, the Claimant's amended claim seeks additional and different relief - in particular damages for breach of contract (instead of claim in debt), and also specific performance. Strictly, this relief should be pleaded in the claim form (CPR 16.2(1)(b)) and for it to be pleaded now, permission to amend the claim form is required. However, even absent amendment of the claim form, CPR 16.2(5) would allow this Court to grant the relief which the Claimant now seeks. Thus, amendment as regards the terms of the relief sought seems to serve little purpose.

Secondly, as regards the Particulars of Claim, the requirement is to plead the relevant facts. There is no obligation to plead the legal consequences of the facts pleaded, nor are there any special rules applicable to the pleading of a claim for breach of contract, as submitted by the Claimant.

Thirdly, here, the proposed amendments to the Particulars of Claim (aside from the amendments to the relief sought) are very largely amendments as to the legal consequences of the facts already pleaded. The only new fact pleaded in the proposed amendment is the fact that the Defendant has not paid the Relevant Rent. For this reason, it may be that, strictly, permission to amend is required. However this is something which has, obviously, at all times been known to the Defendant and is implicit in the Main Judgment. Whilst it is certainly the case that the existence of the Settlement Agreement is a "new fact", it is not referred to, nor relied upon, in the proposed amendments.

Fourthly, if, as a result of the pleading of this new fact, permission to amend is strictly required, in my judgment, the balance of justice here comes down in favour of allowing the amendment. Whilst I accept that the formal amendment seeking to put its case on the correct legal formulation has been sought very late in the proceedings and that the legal basis of the claim has not at all times been very clearly expounded, nevertheless the Defendant has known from the outset of the proceedings that the Claimant has been seeking a money judgment against the Defendant for the Relevant Rent and the amendments amount to no more than a change in the legal categorisation of the basis for that payment. Unlike the cases cited to me, the amendment sought here involves no substantially new factual allegations and no further evidence has been required to support or resist the case now advanced. Moreover that the legal basis of the claim for a monetary judgment has been changed might be regarded as unsurprising, since it is not entirely obvious why a claim for indemnity is necessarily one for damages for breach of contract, rather than one in debt: see MacGillivray on Insurance Law (12th edn) §20-072 and fn 294. It is a relevant factor that the Defendant suffers no prejudice uncompensatable by costs as a result of the amendment being allowed. The case has not been formally adjourned and the Defendant has not sought to adduce, nor been precluded from adducing, further evidence. The Defendant's only complaint of any substance is that the Defendant did not properly formulate the legal basis of its claim at the outset. It may be that this failure has resulted in extending the period over which the Court has heard argument on these issues. If this in turn has resulted in additional costs having been incurred, then this can be reflected in any award of costs. Finally, I take account of the fact that it is possible that the further argument relating to the amendments may have taken up a certain amount of additional sitting time for this Court - time which could conceivably have been used by other litigants. However the time involved has been relatively small, and resulting "injustice" to those litigants, if any, (when taken together with limited injustice to the Defendant) is outweighed by the injustice in not allowing the Claimant to put forward the case it now wishes to advance.

As regards late disclosure of the Settlement Agreement, whilst I accept that the Claimant should have disclosed it earlier, this is not a ground for refusing the amendment sought: it is not relied upon in, and is thus not relevant to, the proposed amendment. Moreover as I find below, it does not affect the outcome of the case in any event. The Defendant's arguments about wishing to explore other matters at trial or its overall commercial approach to this litigation are based on the late disclosure and not on the effect of the proposed amendment - and thus are not grounds for refusing the amendments. I do not accept the Defendant's arguments that there were other matters arising from the amendment which it would have wished to canvass in evidence with the witnesses.

For these reasons, I grant permission to the Claimant to amend its Particulars of Claim in the form submitted.

The Settlement Agreement between the Lessor and the Claimant was signed on 24 July 2013. It bears the heading both of the present proceedings and of the Possession Action.

Clause 2 sets out definitions, including definitions of the current proceedings (the Firmdale Litigation) and the Possession Action. It includes also the following:

The recitals in clause 3 include, at clause 3.6, the statement that the parties (i.e. the Claimant and the Lessor) wish to resolve between themselves the question of payment of the amount outstanding under the Possession Action Order (i.e. the amounts due as between the Claimant and the Lessor, including but not limited to the Relevant Rent).

Then Clause 4 records the terms of the agreement. Of particular importance are the following provisions:

Clauses 4.6 and 4.7 then contain a series of provisions which give the Lessor substantial influence over the conduct of the Firmdale Litigation, including the right to approve legal representation and offers of settlement, and to control any appeal. Further, clause 4.7.1 provides for termination of the agreement in the event of breach, in which event the Lessor has liberty to enforce the Possession Action Order. Clause 4.8 provides, inter alia, that the Claimant will use its best endeavours to prosecute its claim, and to defend the counterclaim, in the Firmdale Litigation. The final clause, Clause 4.14, provides as follows:

The parties' respective submissions on the Settlement Agreement are summarised in paragraphs 11(2) and 12(2) above. In this context, the Claimant relies upon the decision of the Court of Appeal in Mobil North Sea Ltd v PJP Pipe and Valve Co [2001] 2 All ER (Comm) 289. The Defendant submits that the Mobil case is distinguishable from the present case.

In that case, Mobil employed Fluor as main contractor for a project. PJ Pipe, as sub-contractor of Fluor, supplied defective valves for the project. Fluor in mitigation of its loss replaced the defective valves at its own cost. Both Mobil and Fluor brought proceedings against PJ Pipe claiming the costs of replacing the defective valves. The two claimants entered into a settlement agreement in full and final settlement of any claims that they had against each other in respect of defective materials supplied by PJ Pipe. Under that settlement, the proceeds of the litigation against PJ Pipe were to be received by Mobil and Fluor was to receive a guaranteed minimum payment. PJ Pipe applied for Fluor's claim against it to be dismissed, contending that, even if the valves had been defective (and thus Fluor had suffered loss initially), Fluor had no substantive claim for damages against PJ Pipe because as a result of the settlement agreement it had made with Mobil, it had avoided any loss that it, Fluor, could claim against PJ Pipe.

The Court of Appeal upheld the judge's dismissal of PJ Pipe's application, holding, inter alia, that the settlement agreement was not an act of mitigation of PJ Pipe's alleged breach of contract. On its true construction, the settlement agreement was not an attempt by Fluor to mitigate its losses. The settlement agreement and Fluor's claim against PJ Pipe were wholly independent transactions.

In the leading judgment, Rix LJ made the following points. First, Mobil claimed to have a direct cause of action against PJ Pipe, but, as Rix LJ pointed out, PJ Pipe itself disputed this and that this was for that reason that PJ Pipe sought to strike out Fluor's claim: §11. Secondly, the settlement agreement was in full and final settlement of claims between Mobil and Fluor in connection with the valves supplied by PJ Pipe: §13. Thirdly, pending resolution of the litigation against PJ Pipe, Fluor remained liable to Mobil and that liability was in part the liability that might be the subject of Fluor's claim against the PJ Pipe: §14. Although the agreement was in full and final settlement of any claim by Mobil against Fluor, that did not mean that the agreement itself did not maintain a liability of Fluor to Mobil subject to its own terms: i.e. there was an independent liability of Fluor to Mobil under the terms of the settlement agreement itself. Rix LJ then gave three reasons for dismissing PJ Pipe's application (identified at §17 as "three critical hurdles").

First, PJ Pipe's argument wrongly assumed that Fluor's claim against PJ Pipe was solely for an indemnity against its liability to Mobil. In fact Fluor's claim against PJ Pipe was also a direct claim for breach of the sub-contract for the cost of replacing the valves. The settlement agreement did not deal at all with Fluor's independent claim against PJ Pipe under the sub-contract. The terms as between Fluor and Mobil upon which the cost of the replacement valves were financed were amended: see §§17, 20, 21, 23.

Secondly, in any event PJ Pipe could not show that the settlement agreement was a complete discharge of any liability on the part of Fluor to Mobil. Even if Fluor's claim against PJ Pipe was for an indemnity against its liability to Mobil, the settlement agreement did not entirely remove Fluor's liability to Mobil under the head contract. The terms of the settlement were premised upon Fluor having a continuing liability to Mobil and a claim against PJ Pipe which it was obliged to prosecute and to account to Mobil on the basis set out in the settlement agreement: §§14, 18 and 24.

Thirdly, in any event PJ Pipe could not show that the settlement agreement was not an entirely independent transaction - res inter alios acta. Rix LJ referred to the principles to be applied in relation to the rule that loss which is avoided cannot be recovered, citing the then current edition of Chitty on Contracts and the well known passages in Viscount Haldane's speech in British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 at 689. In particular he cited Chitty (in passages which also appear in the current edition at §§26-093 and 26-097) stating:

The question is whether the transaction relied upon as avoiding the loss is "an entirely independent and collateral matter" arising not in the context of mitigation at all. Rix LJ held that Fluor's act of mitigation was the replacement of the pipes and not the later settlement agreement between Fluor and Mobil. It was not an attempt at mitigation; it was merely a reformulation of relations between Mobil and Flour and a reorganisation of the terms upon which those two parties were going to conduct litigation against PJ Pipe. Referring to R Pagnan & Fili v Corbisa Industrial Agropacuaria Ltda [1970] 1 WLR 1306, he pointed out that the "mitigating" transaction in question was not between the same parties as the transaction the subject of the claim; for a transaction to have been connected in that sense, it would have had to have been one between Fluor and PJ Pipe. See §§19, 26-33.

Here, both parties make a number of points by reference to the Mobil case. First, the Defendant points out Mobil had a direct contractual remedy against PJ Pipe, whereas, in the present case, the Lessor has no direct contractual rights against the Defendant. I do not consider this to be significant. First, because PJ Pipe's application appeared to be premised on its position that Mobil did not have such a direct remedy, and, secondly, because, in any event, even if it did have such a remedy, this does not seem to me to be a material distinction.

Then, in relation to Rix LJ's "first hurdle", the Claimant submits that, in the present case too, the Claimant's claim is not merely for an indemnity, but there is also a primary claim for damages for breach of contract between the Claimant and the Defendant. By contrast, the Defendant submits that, unlike the present case, Fluor had paid for replacement parts and had mitigated its loss. Its claim was not for an indemnity and the settlement agreement did not affect or deal with Fluor's direct claim against PJ Pipe. I accept that the claim in the present case is also not just a claim for an indemnity. However, the "primary claim" here (for damages) is very similar to being a claim for an indemnity. The loss arising from the breach is the loss arising from Claimant's liability to the Lessor. On the other hand, in Mobil too, there was, on the facts, a close relationship between Fluor's primary claim for loss and the position of Mobil, since Mobil had in fact financed the cost of the replacement valves and under the settlement agreement they would recoup, to some extent, that financing: see §§22 and 23. On balance, therefore I do not consider that any difference in this connection is sufficiently material to distinguish the Mobil case from the present.

In relation to Rix LJ's "second hurdle" (not a complete discharge), the Claimant submits that, as in Mobil, here there are similar continuing obligations upon the Claimant to prosecute the litigation against the Defendant and to account to the Lessor for the proceeds (see Clauses 4.6 and 4.8) and further that, under the Settlement Agreement, the Claimant has not been discharged altogether from liability to the Lessor. The Defendant, on the other hand, submits that, in Mobil the effect of the Settlement Agreement was only to vary, but not discharge Fluor from liability (§§12, 14, 24). By contrast, in the present case there is no continuing liability of the Claimant to the Lessor. By virtue of the Settlement Agreement, the Claimant has been fully released.

Finally, in relation to Rix LJ's "third hurdle", the Claimant submits that the Settlement Agreement was not in mitigation of loss, but, as in the Mobil case, it was "res inter alios acta"; a reformulation of the relationship between the Claimant and the Lessor. Asking the Lessor to be excused liability for the rent under the Lease and under the Possession Action Order is entirely independent and collateral and not an act seeking to reduce the loss flowing from the Defendant's breach. The Defendant submits that the Settlement Agreement deals with the very claims which are the subject of these proceedings. The purpose of the Settlement Agreement was to mitigate the Claimant's loss - its liability for the Relevant Rent. In Mobil, the settlement regulated the relationship between Mobil and Fluor and did not affect either Mobil or Fluor's rights against PJ Pipe. It did not mitigate the loss arising from payment for replacement valves. By contrast, in the present case, the Settlement Agreement does mitigate the loss because it absolves the Claimant of liability to the Lessor and thus takes away the loss which underpins the Claimant's rights against the Defendant.

These contentions, in relation to the second and third "hurdles" in the Mobil case have at their core two issues. First, the effect of the Settlement Agreement, on its true construction, on the Claimant's liability to the Lessor under the Lease and the Possession Action Order; and secondly, whether the Settlement Agreement is an act in mitigation or, rather, res inter alios acta. I address each of these in turn.

As stated above, the Defendant submits that the effect of the Settlement Agreement is to have discharged, as of 24 July 2013 and for all time, the Claimant from all liability to the Lessor.

The Claimant submits that the Settlement Agreement has not so discharged the Claimant and advances two main reasons. First, the release in Clause 4.5 only operates if the Claimant receives something by way of proceeds of the current litigation. Secondly, the release only operates when there has been a determination of the proceeds of the current litigation, and that, until that happens, the Claimant's liability to the Lessor under the Possession Action Order remains, even if its enforcement is currently stayed. The Claimant's indebtedness to the Lessor exists now and will not cease until this action is concluded.

I do not accept the Claimant's first argument. The condition for release in clause 4.5 is "payment in full as provided in clause 4.1.. " Clause 4.1, in turn, refers to payment of "the Net Proceeds of the Firmdale Litigation Referable to Rent"; which in turn is defined as part of "the Net Proceeds of the Firmdale Litigation". However, there is no requirement for those "Net Proceeds" to be a positive sum payable to the Claimant. The Net Proceeds of the Firmdale Litigation is defined as "such sum ... as may be agreed ... awarded or found due to Durley House less such sum .. .as may be agreed, awarded to Firmdale ... and also less such sums as Durley House expends on ... costs" (emphasis added). In my judgment, on this definition, it was quite possible for the Net Proceeds of the Firmdale Litigation to turn out to be nil.

First, the words "such sum ... as may be awarded" [to Durley House] encompass the possibility of no sum being awarded and, in contradistinction to words like "the sum as is awarded"; they mean the same as "such sum, if any". These same words are used both in respect of the claim and the deduction for the counterclaim, and must mean the same in each case.

Secondly, even if those words were intended to refer only to a positive sum, then, under the terms of the definitions of "Net Proceeds", any positive sum could easily have been cancelled out by the deductions in relation to the counterclaim and costs; the latter might have exceeded any sum due on the Claimant's claim. Moreover, it was quite possible for the Claimant's claim to have failed altogether - for example, on the compromise issue or the construction issue: see Main Judgment, §§12(1) and (2) and 14(1) and (2). In both cases the Net Proceeds would be nil, or indeed a negative sum; and in either event, would result in nothing being paid over pursuant to clause 4.1. However, even in that event, clause 4.1 would still have been complied with, and the condition, for discharge and release, in the opening words of clause 4.5 would have been met. There would have been "payment in full as provided in clause 4.1". It cannot have been the intention of the parties to the Settlement Agreement that the Claimant's liabilities to the Lessor would be fully discharged in the event that the Claimant's ultimate net recovery in these proceedings were to be £1, whilst, in the event that its net recovery was nil (or indeed that it was liable to the Defendant), the Claimant would remain liable to the Lessor for sums substantially in excess of £2 million. Such a construction would mean, for example, that such a substantially different outcome might depend on a single disputed item of legal costs.

However, I accept the Claimant's second argument. There is potentially an inherent circularity in the position created by the Settlement Agreement. On its face, the effect of the Settlement Agreement is to discharge the Claimant from its liability to the Lessor under the Lease and the Possession Action Order, in return for an obligation to pay over to the Lessor the proceeds of this litigation. On the one hand, the liability of the Claimant to pay those proceeds to the Lessor under the Settlement Agreement does not arise until there is a judgment by this Court that the Defendant pays the Claimant. On the other hand, if the effect of the Settlement Agreement is that the Claimant no longer has any liability to the Lessor under the Lease and the Possession Action Order, then, the Claimant no longer has sustained any loss, and, it may be argued, there is no longer any basis for this Court to order that the Defendant pay to the Claimant damages for such loss.

In order to break this potential circularity, it is necessary to consider the position as it currently stands - before I have given this judgment. The Settlement Agreement envisages a four stage process. First, the Net Proceeds are determined by the Court; secondly, the Defendant pays the Net Proceeds (if any) to the Claimant; thirdly the Claimant pays over to the Lessor; finally, and only when the Proceeds are paid over, the Defendant's pre-existing liability to the Lessor is discharged. It will be the case that, once I have given judgment and once the Net Proceeds have been determined (perhaps with a sum being "awarded or found due") and once those Proceeds (if any) have been paid over, that the Claimant's liability to the Lessor under the Possession Action Order and the Lease will be discharged and released by clause 4.5. However those steps have not yet happened. Pending full compliance with all the terms of the Settlement Agreement, there is no discharge, but merely a stay on enforcement of the Possession Action Order (clause 4.4) and there is no full and final settlement of all claims (clause 4.14).

In my judgment, the starting point for the construction of the Settlement Agreement is clause 4.1 of the Settlement Agreement, which envisages ascertaining what are the Net Proceeds of the Firmdale Litigation. Only once those are determined and once clause 4.1 is complied with by payment over, does the discharge in clause 4.5 take effect. The determination of the Net Proceeds is a question which is logically prior to and independent of the discharge effected by clause 4.5 and is thus to be determined without taking account of what is provided for in clause 4.5. Further it cannot have been the intention of the parties that what those Net Proceeds are is to be influenced by the terms of the Settlement Agreement. The Settlement Agreement is premised on a potential finding of liability on the part of the Defendant without taking account of the terms of the Settlement Agreement.

Thus, as of now, and prior to any potential discharge by virtue of clause 4.5, the Claimant is under an existing and ascertained liability to the Lessor under the Possession Action Order (even if enforcement is currently stayed). It is this existing liability to the Lessor that falls to be taken into account in determining whether the Defendant is under a liability to the Claimant by way of damages for breach of contract or indemnity. This is addressed in section (3) below.

This construction is consistent with business common sense and the obvious intention of the parties to the Settlement Agreement. It is clear that the intention of the parties was to ensure that if the Court were to find that, under the terms of the 2000 Management Agreement and the Licence, the Defendant was liable to pay the Relevant Rent, that rent should be paid over to the Lessor; the party to whom that Rent was at all times ultimately due. The alternative construction - that the effect of the Settlement Agreement as drafted is to defeat the Claimant's claim to a money judgment altogether, to leave the Claimant with a worthless declaration and to relieve a third party - the Defendant - of a liability, found by this Court, for a substantial amount - does not accord with the business common sense of the Settlement Agreement.

I note that the foregoing analysis finds echoes in the Court of Appeal's decision in Hydrocarbons Great Britain Ltd v Cammell Laird Shipbuilders Ltd (1991) 53 BLR 84, a case considered in detail in Total Liban, supra. In Hydrocarbons, an argument similar to that made by the Defendant, albeit on different wording and different facts, was rejected by the Court of Appeal on the basis of the need to break the circularity inherent in the argument, which would defeat the intention of parties.

For these reasons, I conclude that the position now is that the Settlement Agreement has not released or discharged the Claimant from liability to the Lessor for the Relevant Rent or amounts outstanding under the Possession Action Order.

In the light of this conclusion, the issue of whether the Settlement Agreement is an act of mitigation, alternatively, an unrelated transaction which does not amount to avoided loss, does not fall for determination. On this basis, regardless of the degree of connection between the Settlement Agreement and the Claimant's claim against the Degree, the "loss" has not been avoided. This conclusion is supported by the fact that in Mobil, Rix LJ considered that the "second hurdle" was itself a self standing ground for dismissing the application.

Had I concluded, contrary to the foregoing, that the Settlement Agreement has already discharged the Claimant from liability to the Lessor, then, whilst the arguments here are finely balanced, I would have concluded that the Settlement Agreement would have been an "act in mitigation" and a sufficiently closely connected transaction to be taken into account in considering the Claimant's loss.

I accept that, just as in Mobil, the settlement in the present case is not "between the same parties". However I do not understand that Rix LJ was laying down a rule that the mitigating transaction must necessarily be between the "same parties" as those who are party to the contract the subject of the claim. On the other hand, had I found that the Settlement Agreement had fully released the Claimant from liability to the Lessor, then I would have accepted the Defendant's submission and held that, whilst the settlement in Mobil did not affect Flour's rights against PJ Pipe, in the present case by contrast, the Settlement Agreement did affect the Claimant's rights against the Defendant and take away the loss that underpinned the Claimant's rights against the Defendant.

Nevertheless, as stated in paragraph 68 above, the Settlement Agreement does not affect such rights to a Money Judgment which the Claimant otherwise may have.

The Claimant seeks a money judgment in its favour on alternate bases: first, pursuant to the Defendant's obligations to indemnify the Claimant arising variously under clause 8 of the 2000 Management Agreement and under clause 6.1 of the Licence; and secondly, by way of damages for breach of the Defendant's obligations to pay the Relevant Rent directly to the Lessor under clause 7.2.2 (and possibly clause 8 too) of the 2000 Management Agreement and/or under clause 6.1 of the Licence. The latter obligations to pay the Lessor directly are distinct from the Defendant's obligations to indemnify under a contract of indemnity.

The Claimant's obligation now is to pay the Lessor amounts outstanding under the Possession Action Order, rather than the Relevant Rent itself. Thus the damages now sought are not directly based on the Relevant Rent but rather the Claimant's liability under the Possession Action Order in so far as it is referable to the failure to pay the Relevant Rent. The indemnity in clause 6.1 is against all loss etc. In my judgment, as a matter of causation, such amounts are, in principle, recoverable as damages for breach of the Defendant’s obligations.

The Claimant submits that, pursuant to the Defendant's obligations to indemnify, it is entitled to an order that the Defendant should pay to it the Relevant Rent, even though the Claimant itself has not yet paid the Relevant Rent to the Lessor. There is no requirement upon the indemnified to have first paid the creditor, before the court will order an indemnifier to pay the indemnified. In this regard, the Claimant relies upon the speeches of the House of Lords in the Firma C-Trade case and a detailed analysis of earlier cases, most of which were cited in those speeches. The principal earlier cases, in chronological order are: Carr v Roberts (1839) 5 B & AD 78; Lacey v Hill (1874) LR 18 Eq 182; Ashdown v Ingamells (1880) 5 Exch D 280; Johnston v Salvage Association (1887) 19 QBD 458; Wolmershausen v Gullick [1893] 2 Ch 514; In re Richardson [1911] 2 KB 705; In re Law Guarantee Trust and Accident Society [1914] 2 Ch 617; and British Union and National Insurance Co v Rawson [1916] 2 Ch 476 CA.

According to the Claimant, the position is as follows.

The Defendant contends that the Claimant has suffered no loss and cannot recover damages for failure to indemnify, because the Claimant has not paid the Lessor the Relevant Rent. Equity would not grant relief and in any event would not order payment to the indemnified. Payment to the creditor is a pre-condition to establishing the liability of the indemnifier to the indemnified.

First, neither common law nor equity will compel the indemnifier to pay the indemnified before the indemnified has paid the creditor. This is confirmed in Firma C-Trade per Lords Brandon, Goff and Jauncey. In that case, Lord Goff does not deal with the nature of the relief which equity will grant. Whilst equity will grant a declaration where no payment has been made by the indemnified, it will not order the indemnifier to pay the indemnified prior to payment of the creditor by the indemnified.

Secondly, at common law, there must be prior payment: Johnston per Lindley LJ at 460, Wolmershausen at 529; In re Richardson per Cozens Hardy MR at 709; and British Union per Pickford LJ at 481. Lord Goff's statement in Firma C-Trade of the position at common law is obiter dictum and has only been subsequently approved in insurance cases.

Thirdly, equity would not intervene in a case such as the present to order any payment. Despite terms of Lord Brandon’s dictum at 28A-C, equity would not intervene to order payment by the indemnifier to the indemnified where the indemnified had not paid the creditor. There is no obligation in a simple indemnity contract to pay the indemnified. It will only order payment to the indemnified if three cumulative conditions are met: where indemnifier and indemnified have a joint and several liability to the creditor, where the indemnifier has the primary liability to the creditor; and the indemnified does not obtain a windfall. It further contends, similarly, that that there is no case where the indemnifier has been ordered to pay the indemnified where there has been no "direct liability to make payment" either (a) between the indemnified and the indemnifier or (b) between the indemnifier and the creditor ("situation (a)" and "situation (b)" respectively; I assume that "to make payment" means payment to the creditor).

Finally, insurance cases are to be distinguished from cases, such as the present, of general contractual indemnity. Insurance cases are different because there is payment of a premium in return for payment by insurer on a specified event. The Law Guarantee Trust case was decided on the basis that the two contracts (between creditor and indemnified and between indemnified and indemnifier) were both insurance contracts and a premium was paid. Carr v Roberts and Ashdown v Ingamells were both cases where consideration was given for the promise to pay the debts and thus akin they were akin to contracts of insurance. Many of the subsequent cases where Lord Goff's dictum at 36 is relied upon are insurance cases.

Firma C-Trade concerned the construction and effect of an express "pay to be paid" provision in a contract of indemnity insurance between shipowners and P & I Clubs. The House of Lords held that, as a matter of construction of that provision, payment by the shipowners to the claimants was a condition precedent to the obligation of the clubs to pay the shipowners and those express provisions could not be disregarded or overridden. As a result, the shipowners had no right to indemnity from the clubs, and thus the claimants, seeking to enforce the shipowners' rights under the Third Party (Rights against Insurers) Act 1930 could have no greater rights than the shipowners.

In the course of their speeches, their Lordships considered the general position in relation to claims to enforce contracts of indemnity and whether or not there is a requirement, in general, for the indemnified to have paid the third party before the indemnifier is liable to reimburse or pay the indemnified. The context was an argument made by Mr Sumption (as he then was), that the express "pay to be paid" provision in the contract in that case was no different in principle from the "pay first" condition which was implied at common law in any contract of indemnity and that, just as equity could override that implied condition at common law or order payment before the indemnified paid, so equity in that case could override the express "pay to be paid" provision. In the course of that argument Mr Sumption made detailed submissions on the position in general in relation to contracts of indemnity both a common law and in equity and in particular in relation to the need for the indemnified to have paid the third party creditor before the indemnified is liable to the indemnified: see 16F-18A and Lord Goff's speech at 33H-34H.

The House of Lords rejected Mr Sumption's argument, but on the specific ground that in that case the express "pay to be paid" provision did override what was otherwise the position under the general law. Their Lordships largely accepted his underlying argument concerning the general position, absent the express "pay to be paid" provision.

Lord Brandon gave the leading judgment with whom the four other Lords agreed. Addressing the argument that under equitable principles, the shipowners were entitled to be indemnified without the need for them to have discharged their liabilities first themselves, he said (at 28A-C):

Lord Goff (with whom Lord Ackner also agreed) added a few words of his own. He dealt with Mr Sumption's "elaborate and formidable" equity point in detail at 33D-36D, concluding ultimately that Mr Sumption was unable to overcome the difficulty that equity could not override the "express pay to be paid" provision in that case. He said (at 35F-36C):

Lord Jauncey (agreeing with Lord Brandon) also added his own words on Mr Sumption's equity arguments at 39H-42G. As regards the position at common law, he effectively agreed with Lord Goff. The decision in Collinge v Heywood, where it was held that, at common law, the indemnified had no cause of action against the indemnifier until he had paid the third party, was a procedural decision only, based on the need for a breach of undertaking in the action of assumpsit, and that it laid down no rule of law as to the common law rights of parties under a contract of indemnity. In fact that case imported of necessity that the indemnifier was contractually bound to act before the indemnified paid, even if at common law that obligation could not be enforced. As regards the position in equity, he considered (at 40F-41G) the authorities, including Lacey v Hill, Johnston v Salvage Association, Wolmershausen, Richardson, Law Guarantee Trust, and British Union v Rawson, citing, in particular, those passages in Law Guarantee Trust and British Union which, as explained below, support the proposition that, in equity, the indemnifier can be required to pay not merely the creditor but, if required, the indemnified, before the indemnified has paid the creditor. Lord Jauncey concluded (at 41F-G) that "there is no doubt that these cases all accurately state the rule of equity which is applicable to an ordinary indemnity arising ex contractu or ex lege".

Thus their Lordships were divided as to the precise position at common law. Whilst they agreed that equity would provide a remedy even before payment by the indemnified, they did not definitively identify the circumstances when equity would order the indemnifier to pay the indemnified before the latter had paid the creditor.

As much of the argument before me has centred upon analysis of the foregoing passages from the speeches in Firma C-Trade and their references to previous authorities, I turn now to consider these cases.

In Carr v Roberts one JW was obliged to pay AS an annuity and had other debts. By deed between JW and the Defendant, R, JW conveyed land to R, in consideration of R agreeing to pay off JW's mortgages and debts. R covenanted to indemnify JW in respect of JW's debts. AS obtained a judgment against JW's administratrix, Carr, for arrears of the annuity. Carr had paid a small part of those arrears, but not the rest. Carr claimed the full amount of the arrears from R. The Court held R liable for the full amount, despite the fact that Carr had not paid over to AS. All three judges held R liable on the basis of R's separate covenant to pay JW's debts (to his creditors). Littledale J added that it made no difference whether Carr applied the money in discharge of the debt to AS or not. Two of the three judges further held that R would also have been liable on the indemnity covenant itself, even though the indemnified had not paid the creditor. Non-payment was sufficient to warrant full indemnity and that prior payment by indemnified was not a condition to liability under the indemnity covenant. In Law Guarantee Trust, Buckley LJ (at 632) emphasised that Carr v Roberts did not turn upon the fact that there was also an obligation to pay, and not just an obligation to indemnify.

In Lacey v Hill a stockbroker sought payment for the stock which he had purchased, as agent, on behalf of his principal. The principal's estate referred to Collinge v Heywood, to argue that payment was not due because the agent had not paid for the stock. Nevertheless Sir George Jessel MR (at 121-122) held that the agent was entitled to be indemnified by the principal for price of the stock, for which the agent was liable to the seller, but which he had not in fact yet paid for, stating, that, in equity:

In Ashdown v Ingamells B agreed with A to pay off A's creditors (C) as part of the price it paid for A's business. B failed to pay off the debts. A went into bankruptcy; its only creditors were those whom B had not paid. A's trustee in bankruptcy sued B for payment of the sums B had agreed to pay to the creditors. The Court of Appeal held that A's claim succeeded. The reasoning of both Bramwell LJ and Brett LJ was essentially the same. The failure by B to pay the creditors was a breach of the contract between A and B that B should pay the creditors. If A had not become insolvent, A would clearly "have been entitled to recover by way of damages, the sum which the defendant (B) ought to have paid, but did not pay". A's trustee in bankruptcy had the same right to recover. Carr v Roberts was approved as supporting this conclusion. Whilst Bramwell LJ pointed out that, if anything, the present case was stronger, because B's obligation was not merely to indemnify A, but to pay A's debts directly, he added that this distinction was ultimately immaterial. Bramwell LJ's observation to that effect was subsequently approved by Buckley LJ (at 632) in Law Guarantee Trust. The indemnified was able to recover from the indemnifier before having paid out the creditor.

In Johnston v Salvage Association, the plaintiff sued the defendant shipowner for work, labour and expenses incurred in seeking to save the ship. The defendant sought to join, as third party, the insurers of the vessel to recover those expenses under the suing and labouring clause of the insurance policy. The Court of Appeal held that it could not join the insurers, because that clause in the insurance policy was not a contract of indemnity. Lindley LJ (at 460-461) contrasted a contract of indemnity in the following terms (in a passage cited by Lords Brandon and Jauncey in Firma C-Trade):

In Wolmershausen v Gullick three directors of a company were co-sureties for a bank loan to the company. The bank obtained judgment against the administratrix of one of the sureties, W, for the full amount outstanding, but W did not pay the bank. W sought to join the other two co-sureties. Wright J held that if the bank had been party to the action, the court could have ordered the co-surety to pay his proportion directly to the bank. Since the bank (creditor) was not a party, the Court could not order payment to the bank or prevent the bank enforcing against W. Nor could the Court order the co-surety to pay his share to W, because W could not give him a discharge as against the bank. However the Court could make a declaration of right and, if W were to pay more than its share to the bank, W could recoup it. A surety who pays more than his proper share of the debt is entitled to contribution from co-sureties. Further if W were just to pay her own share, then the co-surety was to indemnify against any further liability "and is by payment to [W or to the bank] or otherwise to exonerate W from liability beyond the extent of her own share". The judge pointed out that that case was distinguishable from the claimant who merely claims indemnity, where there is no question arising as to any other party and approved Lacey v Hill as being such a case. The remedy of a declaration that once W paid her own share, the co-surety is liable to pay either W or the bank the remaining share is entirely consistent with position on straightforward indemnity, not involving co-sureties.

In In re Richardson the wife of a lessee under a lease was the beneficiary of trust of the lease and was liable to indemnify her husband, the lessee. The lessor obtained judgment against the husband lessee for rent and breach of covenant. The husband had gone bankrupt. The lessor then sued the wife in his own name and in the name of the husband's trustee in bankruptcy suing under the lessee's right of indemnity. That action was compromised on terms that wife paid a substantial part of the amount claimed. The lessor then applied to the court in bankruptcy to determine to whom the balance should be paid: the lessor in respect of the rent and breach of covenant, or the estate of bankrupt husband. The Court of Appeal held that the lessor (the creditor) was entitled to the money i.e. that the money paid under the indemnity had to be applied to pay the debt in respect of which the indemnity was given.

Cozens-Hardy MR stated (at 709-710) that, at common law, the indemnified had to pay first before claiming against indemnifier. But in equity, there is a wider right for the indemnified.

Fletcher Moulton LJ (at 712-713) stated that at common law the indemnified could not sue the indemnifier unless the former had paid the creditor. As regards the position in equity, he said:

On the facts of that case, the money had already been recovered from the indemnifier (the wife) by the indemnified. The only question was whether the indemnified was then bound to pass it on to the creditor. Thus, observations about whether the indemnified is entitled to be indemnified before payment were obiter.

In In re Law Guarantee Trust and Accident Society a guarantee society (LGT) guaranteed debts due from a company to debenture holders (the first contract). In turn, a mortgage insurance company (LMI) agreed (the second contract), in return for a premium guaranteed LGT, to pay LGT a portion of its liability under the first contract. Sums were outstanding to the debenture holders from LGT. LGT went into liquidation and was likely to pay out to its creditors a partial dividend only. The question was whether LMI was liable to pay to LGT's liquidator the full amount of its portion of the outstanding sums or only the proportion of that sum which represented the dividend that the liquidator would pay out to the creditors.

There was a dispute as to the nature of the two contracts - whether the first contract was a contract of insurance or a contract of guarantee, and whether the second contract was a contract of reinsurance or a contract of indemnity. The Court of Appeal held that, on balance, the first contract was one of insurance and the second contract was a contract of reinsurance and that LMI was liable to pay to the liquidator of LGT the full amount rather than a portion of the dividend payable by the liquidator to the debenture holders. It further held that, even if the second contract was a contract of indemnity (and not reinsurance), the result would be the same and LMI was obliged to pay, even if LGT had not paid the creditors

In summary, the following points emerge from Law Guarantee Trust. First, a general contract of indemnity is distinct from a contract of insurance, but the result was no different whether contract was one of insurance or indemnity. Secondly, under a contract of indemnity in general, in equity there is no requirement for the indemnified to have paid the creditor first; the indemnifier is required to pay the indemnified, regardless of whether indemnified has paid, or will pay, the creditor: Buckley LJ at 633-634, Kennedy LJ at 638-639 and Scrutton J at 652. In particular, Buckley LJ stated (at 633):

Thirdly, In re Richardson was distinguished by Buckley LJ (at 633), Kennedy LJ (at 640-641) and Scrutton J (at 650-51) as being decided on very particular facts; most notably on the basis that in that case the indemnifier (the wife) had a particular interest in ensuring that the sums she paid were passed on to the creditor lessor. (She was in occupation under the lease). By contrast, LMI had no interest in seeing how LGI applied the money it paid to it. Scrutton J in particular, after pointing out that he could not see how on the facts the creditor hospital had a direct claim against the indemnifier, went on to state that Fletcher Moulton LJ's view could not stand with the earlier decisions in Ashdown v Ingamells and Carr v Roberts.

In British Union and National Insurance Co v Rawson [1916] 2 Ch 476, a company, BU, obtained judgment against B for unpaid calls on shares, but did not receive payment. Under a prior contract, B had right of indemnity against Rawson (R). B assigned this right of indemnity to BU and BU sued R for payment of the judgment amount, in its capacity as assignee of R. R argued that it was a contract to indemnify against actual loss and as R had not paid and could not pay the creditor, there was no liability. The Court of Appeal held that, although R had paid nothing, she was entitled to have the amount of the calls paid either to BU (the creditor) or to herself (the indemnified) and BU was entitled as assignee to have R's rights enforced by order directing payment to themselves. Pickford LJ (at 482) stated that, whatever the position at common law:

Finally, I have also been referred to the earlier case, in the context of landlord and tenant, of Smith v Howell (1851) 6 Exch 730, where an assignee of a lease was required to honour the terms of the indemnity it had given to the assignor, even though the latter had not paid the lessee from whom it had previously taken an assignment. In particular, the assignee was held liable to pay to the assignor the costs which the lessee had been held liable to pay to the lessor, and in respect of which it cannot itself have been liable directly to pay to the lessor (as a matter of privity of estate).

I was also referred to three more recent pre-Firma C-Trade cases: Telfair Shipping Corporation v Inersea Carriers SA [1985] 1 WLR 553 and two cases there cited County and District Properties Ltd v C Jenner & Son Ltd [1976] 2 Lloyd's Rep 728 and R & H Green & Silley Weir Ltd v British Railways Board (Note) [1985] 1 WLR 570. Whilst these cases considered the rules of common law and equity in relation to contracts of indemnity (including many of the cases set out above) they were essentially concerned with the issue as to when, for limitation purposes, the indemnified's cause of action against the indemnifier arises; and most particularly whether it arises upon the indemnified's liability to the third party being incurred, or, later, upon that the fact and extent of that liability being ascertained. It was held that, subject to the terms of the particular indemnity, in general the cause of action arose on the latter of those occurrences. It was not suggested that in fact the cause of action arose only at a still later date, namely the date of payment by the indemnified to the third party. For this reason, these decisions are not directly in point.

From these authorities, I draw the following conclusions. First, a contract of guarantee is to be distinguished from a contract of indemnity. In the former case, there is a direct contractual obligation between the creditor and the guarantor (the surety). In the latter, whilst there are contractual obligations between the creditor and the indemnified and between the indemnified and the indemnifier, there is no such obligation between the creditor and the indemnifier. A contract of insurance is a type of contract of indemnity characterised by the obligation to indemnify arising upon the happening of an event which is a risk. The obligations of the Defendant under clause 8 of the 2000 Management Agreement and the second obligation under clause 6.1 of the Licence are obligations owed to the Claimant as a contract of indemnity.

Secondly, prior to the Judicature Acts, the common law and equity had different rules relating to contracts of indemnity, and in particular as to whether there was a condition of prior payment to the creditor. However, since those Acts, it is the rules of equity which prevail and are to be applied by this Court: Firma C-Trade per Lord Brandon at 28C.

Thirdly, as highlighted by the parties' submission here, there is some doubt as to the true underlying analysis of the position at common law, and in particular whether the requirement of prior payment was a condition precedent to the right to be indemnified, or only a procedural requirement for the grant of a remedy: see Lord Goff and Lord Jauncey in Firma C-Trade and Collinge v Heywood. One view is that under a contract of indemnity requiring the indemnifier to "hold harmless" the indemnified, the true obligation of the indemnifier is to prevent the indemnified sustaining any loss or expense in the first place, rather than merely to reimburse the indemnified only once the latter has paid or lost. It is certainly the case, that the English authorities are at one in taking the view that the remedy for breach of a contract of indemnity is damages, rather than one for a contractual sum due (i.e. debt). Ultimately, given the priority given to the position in equity, it is not necessary to resolve this particular debate.

Fourthly, and importantly, the position in equity, was, and is, as follows. The indemnified is entitled to a remedy from the indemnifier, even if the indemnified has not paid the creditor: British Union per Pickford LJ. The position is no different even where the indemnifier's obligation is merely one of indemnity and does not include an express obligation to pay the creditor directly: Carr v Roberts, Ashdown v Ingamells and Law Guarantee Trust, per Buckley LJ (at 631) and per Scrutton J (at 652). The court can order payment to the creditor or payment into a fund.

Finally, as regards payment to the indemnified, in Firma C-Trade, Lord Brandon said, without further exposition, that the court can order payment to the indemnified "in some cases". In my judgment, an analysis of the earlier authorities establishes that the Court can so order: see Carr v Roberts, Lacey v Hill, Law Guarantee Trust and British Union, per Pickford LJ and Warrington LJ. Wolmershausen is not authority to the contrary; it was concerned with the special position of indemnity between co-sureties; it cited Lacey v Hill with approval, and, in its assessment of the position once one co-surety has paid its share to the creditor, supports this conclusion. As to In re Richardson, the decision itself does not relate to this issue, and in Law Guarantee Trust, the case was clearly distinguished, as being one on its own facts, and on the basis that the indemnifier had a special interest in ensuring payment to the creditor; the dictum of Fletcher Moulton LJ was specifically criticised by Scrutton J in Law Guarantee Trust.

As to the Defendant's further arguments (see paragraphs 80 and 81 above), as a matter of analysis, I see no particular rationale for the imposition of limitations upon the circumstances when payment to the indemnified is permitted. Moreover the authorities do not support these arguments. In Carr v Roberts, the indemnifier was not liable to the creditor at all and further the majority held that the existence of the obligation, owed to the indemnified, to pay the creditor (situation (a) referred to in paragraph 80 above) was not determinative of the outcome. The result would have been no different, had there not been a contract between indemnifier and indemnified for the former to pay the creditor. In Ashdown v Ingamells, as to situation (a), Bramwell LJ (in a passage approved by Buckley LJ in Law Guarantee Trust) made it clear that the result would have been no different, had there not been a contract between indemnifier and indemnified for the former to pay the creditor. In Law Guarantee Trust itself, it appears that the indemnifier had no liability to pay the creditor at all - so neither situation (a) nor situation (b) applied, and even if it did have such a liability, Buckley LJ agreed that it made no difference. In British Union - said to be a situation (b) case - the indemnifier was only liable to the creditor, because the latter had taken an assignment of the indemnified's rights. Finally, in Lacey v Hill, Sir George Jessel's statement was one of general principle.

Further, I do not accept that there is a relevant distinction between insurance cases and cases of general indemnity contract. The Court of Appeal in Law Guarantee Trust expressly stated that its analysis applied equally if the contract in question was properly analysed as one of indemnity. Moreover in other general cases, there is consideration for the promise to indemnify. In the present case, there was such consideration moving from the Claimant under the 2000 Management Agreement for the promise of indemnity.

On the basis of these authorities, I am satisfied that in present case equity would have ordered, and this Court can order, payment by the indemnifier to the indemnified and that it is no concern to the Defendant to ensure that payment is passed on to the Lessor. In any event, the terms of the Settlement Agreement, now known to the Defendant and the Court, are such that, under its terms, ultimately Relevant Rent will be paid over to the Lessor.

For these reasons, I conclude that the Defendant is liable to the Claimant for damages for breach of the obligations to indemnify in Clause 8 of the 2000 Management and clause 6.1 of the Licence and the Claimant is thus entitled to a Money Judgment against the Defendant in respect of the Relevant Rent.

The Defendant was under a direct obligation owed to the Claimant to pay the Relevant Rent to the Lessor, certainly under clause 7.2.2 of the 2000 Management Agreement and also under the first clause 6.1 obligation. Plainly the Defendant was in breach of this obligation.

The Claimant submits that it is entitled to payment of the amount of the Relevant Rent by way of damages for breach of that contractual obligation and relies upon, inter alia, the decision of Peter Gross QC (as he then was) in the Total Liban case. The Defendant submits that, as under the indemnity, the Claimant is not entitled to damages because it has not paid the Lessor and has thus not suffered loss. Total Liban is not in point, because in that case the liability of B (indemnified) to C (creditor) was caused by breach by A (the indemnifier) of his contract with B. In response the Claimant submits that the loss caused by the Defendant's breach in failing to pay the Lessor was the Claimant’s liability to pay the Lessor which crystallised or "bit" on each quarter day when the Relevant Rent fell due. Had the Defendant not breached its obligation, the Claimant's liability would not have crystallised.

The issue is whether the Claimant has sustained any recoverable loss as a result of the clear breach of clause 7.2.2. Whilst, in view of my conclusion in paragraph 114 above, a decision is not strictly necessary, I consider this issue as follows.

First, in Total Liban, the question of law raised was (at 645G-H)

In my judgment Total Liban is not directly on point with the present case. First, C's loss (and B's liability to pay C) arose only as a result of A's breach of contract with B. Secondly, the case was essentially concerned with the ability of C to recover for that loss. In the present case, however, the Lessor's right to payment does not derive from the Defendant's breach; it has and had a pre-existing right to payment by the Claimant under the Lease.

Secondly, however, I consider that two of the cases cited above do support the Claimant's claim for payment of the Relevant Rent as damages for breach of the Defendant's obligation to pay the Lessor. As explained above, in both Carr v Roberts and in Ashdown v Ingamells, the "indemnifier" was under an obligation to the "indemnified" to pay the latter's debts to one or more creditors and directly to those creditors. As in the present case, there were also contracts of indemnity. Nevertheless in each case the Court held that the breach of A's obligation owed to B to pay C entitled B to obtain payment from A. In Carr v Roberts, all three judges held the defendant liable to pay on the covenant to pay the debt. Patteson J expressly referred to this liability as one for damages and he and Littledale J were unconcerned about the possibility of the plaintiff not applying the damages to discharge the debt due to the creditor. In Ashdown v Ingamells, Bramwell LJ (at 284) and Brett LJ (at 286) clearly held that party B were entitled to recover, by way of damages for breach of contract the sum which the defendant (A) ought to have paid, but did not pay to C (B's creditors). In neither case, was it an objection that B had not yet paid C.

In my judgment these cases are authority to support the Claimant's case on damages for breach of clause 7.2.2. This position is reflected in Chitty on Contracts (31st edn) Vol. 1 §18-047, where it is stated:

The breach was the failure to pay the Relevant Rent due on the particular quarter day(s) in question. Once that date passed, the breach crystallised and the Claimant became entitled to damages. I conclude that the Claimant is equally entitled to a money judgment by way of damages for breach of the obligation to pay the Lessor, for the relevant outstanding amounts, referable to the Relevant Rent, under the Possession Action Order.

I also heard argument as to the availability and appropriateness of the alternative remedy of an order for specific performance, particularly of the clause 7.2.2 obligation to pay the Lessor, and in particular whether I could and should make a direct order for the Defendant to pay the Lessor. The Defendant opposed the making of such an order for a number of reasons, including that damages are an adequate remedy. I do not accept the Defendant's submission that specific performance ordering payment to C cannot be ordered except in a case where the creditor, C, is a party. Beswick v Beswick [1968] AC 58 is authority to the contrary; the House of Lords held that C (the widow) acting as administratrix of B was entitled to the remedy of specific performance of the A's obligation to pay her in her personal capacity. Nevertheless in view of my conclusion that the Claimant is entitled to a remedy by way of damages, I do not consider that specific performance would be appropriate here. Any concern which the Court might have had about the risk that the sums by way of damages would not be paid over to the Lessor has now been met by the terms of the Settlement Agreement. (I note that the Claimant's solicitors have indicated a willingness to give reasonable assurances in this regard).

The Claimant seeks interest on the amount of the Relevant Rent from the dates that the 2000 revised rent (25 December 2011) and the 2007 revised rent (25 March 2012), respectively, became payable. Thus the principal sums upon which interest is sought are: for the period between 25 December 2011 and 25 March 2012, the difference between the 2000 revised rent and the 1993 revised; and for the period from 25 March 2012, the difference between the 2007 revised rent and the 1993 revised rent. It seeks interest at a rate of 6% on the basis that this is the rate sought by the Defendant in respect of interest on the counterclaim. Its claim is put on the basis of s.35A Senior Court Act 1981. Clause I (b) of the Lease itself provides for interest on unpaid rent at the rate of 2% above Bank of England Minimum Lending rate. The Claimant further submits, in any event, that the rate of interest awarded should be the same as the rate on interest on the Defendant's counterclaim.

The Defendant submits that, since the Claimant has not to date made any payment in respect of Relevant Rent, it is not entitled to any interest. Interest under s.35A is awarded when a claimant has been kept out of its money. The Claimant was never entitled to receive the Relevant Rent and has not paid the same. The Court should not exercise its discretion in the Claimant's favour.

As a starting point, I accept the Defendant's contention that the Claimant has to date made no payment of principal at all. Moreover I can see no justification for the rate being set simply to match the appropriate rate of interest on the counterclaim.

Interest can be awarded as damages for loss caused by failure to pay. I consider that the Claimant is entitled to interest on the Relevant Rent by way of compensation or damages for loss it has sustained as a result of the Defendant's breach of its obligations i.e. its failure to pay the Relevant Rent or its failure to indemnify and hold harmless the Claimant in respect of that rent. Those obligations arose on the relevant quarter days of in December 2011 and March 2012. The Claimant is entitled to be put in the position it would have been in, had the Defendant complied with its obligations to pay directly and to indemnify and hold harmless the Claimant. Had the Defendant so complied, the Claimant would not have incurred any liability to interest under the Lease Thus the Claimant's damages for the Defendant's failure to indemnify and/or to pay directly included interest payable to Lessor and I am going to award an appropriate sum - to reflect interest due on Relevant Rent to date by way of damages.

Moreover and in any event, from the relevant quarter days onwards, the Defendant was required to pay interest, either to the Claimant or to the Lessor. By the terms of the 2000 Management Agreement, Clause 7.2.2. effectively required the Defendant to pay the interest due under the Lease. "Operating Expenses" in respect of which the Claimant is entitled to be indemnified included all expenses and outgoings of any description; that would include interest under the Lease.

The Claimant has not to date paid any interest under the Lease, and is now liable instead under the terms of the Possession Action Order, the amounts due under which appear to include interest on rent and on a continuing basis. That interest includes, but is unlikely to be limited to, interest on the Relevant Rent. Thus the appropriate amount of interest now to be awarded is that portion of the interest for which the Claimant has been found liable under the Possession Action Order, which relates to its failure to pay the Relevant Rent. Once this figure has been ascertained, there will be judgment for that amount.

I have already concluded that the Defendant is entitled to judgment on the counterclaim in the sum of £170,963.11 (Main Judgment §272). The Defendant seeks interest on that amount, pursuant to s.35A Senior Court Acts 1981 at a rate of 6% per annum. The Claimant does not object to this rate, but rather submits that whatever rate is awarded on the counterclaim, should also be awarded on the amount of the claim. As indicated above, I see no justification for this "matching" of interest rate and it is not relevant to the rate of interest on the counterclaim. Accordingly I will award interest on the counterclaim at the rate of 6% per annum from 15 November 2011.

I propose dealing here with the costs of the action up to the date of the Main Judgment, allowing the parties the opportunity to make submissions on the costs since then, arising out of the further argument leading to this judgment.

The Claimant submits that it is the overall winner of the case and that it should be entitled to an order for 80% of its costs of the claim and counterclaim; the reduction being in recognition that it did not succeed on aspects of the case. The Defendant submits that there should be no order as to costs. The Claimant failed on numerous aspects of its original claim and the Defendant succeeded on the counterclaim. The Defendant drew my attention to authorities on the correct approach to the award of costs in cases where there have been a number of claims and issues: AEI Rediffusion Music Ltd v Phonographic Performance Ltd [1999] 1 WLR 1507 at 1523A-B and the eight principles set out by Jackson J in Multiplex Construction (UK) Ltd v Cleveland Bridge UK Ltd [2008] EWHC 2280 (TCC) at §72. Applying these principles, the following are the key considerations in relation to the exercise of my discretion under CPR 44.2.

First, the Claimant, being the party in whose favour the balance of sums is owing, is the overall winner of the action. This has been confirmed by my conclusions in this judgment that it is entitled to a money judgment which substantially exceeds the amount of the counterclaim. At the main trial, the Claimant succeeded on the compromise issue and the construction issue (Issues (1) and (2) in the Main Judgment); it was also successful on the Defendant's counterclaim in relation to the proportion of costs that it was required to pay (Main Judgment §264). Secondly, on the other hand, the Defendant was successful on obtaining judgment on the counterclaim and as to it quantum (Main Judgment §§267 to 269). It was also successful in resisting the Claimant's claims, in substantial amounts, for management fees at any time and for rent after 19 January 2000 (Main Judgment, §7 and Issues (3) to (5). These matters, in my judgment, are sufficient to justify departing from the starting point of costs following the event. Thirdly, I consider that, rather than make an issue-based costs order, it is more appropriate in the present case to make a proportionate costs order.

Taking account therefore of the issues upon which the Defendant succeeded, the appropriate order for costs is that the Defendant should pay to the Claimant 70% of its costs of the action, other than the costs after December 2013.

In the light of my conclusions at paragraphs 114, 122 and 129 above, there will be judgment for the Claimant in the sum of £932,386.88 together with such part of the sums ordered to be paid in the Possession Action Order, as represents interest on that amount. Secondly, the Defendant is entitled to interest on the counterclaim at the rate of 6% per annum: paragraph 130 above. Thirdly, the Defendant will pay the Claimant 70% of its costs of the action up to and including 23 December 2013: paragraph 134 above. I will hear further submissions on the question of costs since December 2013.

Once again I am grateful to both Mr Sisley and Mr Moraes for the further detailed assistance they have provided to the Court.