Court considers common form indemnity provision in partnership agreement (Wood v Priestley and another)

Mark Cawson QC of Exchange Chambers, assesses the practical implications of the judgment in Wood v Priestley concerning the interpretation of an indemnity clause in a partnership agreement between a salaried partner and the equity partners.

Original news

Wood v Priestley and another [2016] EWHC 2986 (Ch), [2016] All ER (D) 04 (Dec)

The Chancery Division dismissed the claimant insolvency practitioner’s claim for an indemnity arising out of a partnership agreement. The court held that, on the true construction of the agreement, the partners of the firm in which the claimant worked were not bound to indemnify him in respect of the costs and expenses and/or any award made regarding an allegation that he and another had been guilty of misfeasance and/or in breach of fiduciary duty.

What are the practical implications that those advising can take away from this case

Essentially, the judgment in this case provides:

  • guidance as to how an indemnity in an agreement between a salaried partner and the equity partners ought to be construed, and
  • guidance as to the circumstances in which a trustee might be entitled to an indemnity

What was the background to this case?

The claimant and another were salaried partners in the Poppleton and Appleby Partnership (the Partnership), of which the defendants were the equity partners. The Partnership carried on insolvency work. The defendants were not licenced insolvency practitioners, whereas the two salaried partners were. Consequently, appointments as administrators and liquidators in a large number of companies were taken by the salaried partners. The claimant’s agreement with the defendants (the Partnership Agreement) provided that he held the appointments on trust for the defendant. The Partnership Agreement also provided (by clause 11) for the defendants to indemnify the claimant against certain liabilities and to take all reasonable endeavours to effect and maintain professional indemnity insurance covering the professional negligence of the claimant.

The claimant and the other salaried partner were removed as liquidators of a company that they had been administrators of and subsequently liquidators of, and replaced by new liquidators. The new liquidators commenced proceedings against the claimant and the other salaried partner (but not the defendants) alleging that fees has been dishonestly charged to the company in administration and liquidation, including fees paid in respect of time said to have been incurred by the defendants for which there was no supporting evidence. The allegations of fraud, which both the claimant and the defendants strongly denied, extended to allegations of fraud against the salaried partners through at least their complicity with what was alleged to have gone on.

In the present proceedings, the claimant sought an indemnity against the defendants to cover the costs of the new liquidators’ proceedings against him, and against any award that might be made against him.

What were the issues before the judge?

The main issues before the judge were:

  • whether as a matter of true construction thereof, clause 11 of the Partnership Agreement extended to provide the indemnity sought, and
  • further or in the alternative, whether the fact that the appointments as administrator and liquidator purported to be held on trust for the partners entitled the claimant to an indemnity as trustee

What were the main legal arguments put forward?

The claimant argued that a proper construction of clause 11, set in its commercial context, required it to be construed as extending to all the liabilities in question; it being appropriate to treat clause 11 as containing additional wording that led to the construction contended for. The defendants argued that on the plain meaning of the words used in clause 11 that it extended to indemnify the claimant as salaried partner only against liabilities of the defendants as partners, and that the liabilities that the claimant sought an indemnity in respect of did not fall within this category.

The claimant argued that his status as a trustee gave him a right to an indemnity from the defendants as the beneficiaries in accordance with trust principles. The defendants argued that the court will not indemnify a dishonest trustee, and until the trial of the proceedings commenced by the liquidators had been determined, that would not be known. It was therefore premature to indemnify. Further such a claim was barred by the terms of a subsequent settlement agreement concluded when the claimant left the Partnership. More fundamentally, on proper analysis there was no trust as a personal appointment as office-holder could not be held on trust.

What did the judge decide, and why?

The judge decided the construction point in the defendant’s favour following Arnold v Britton [2015] UKSC 36, [2015] All ER (D) 108 (Jun). The ordinary natural meaning of the words of clause 11, even in the commercial circumstances in which they were set, was only sufficient to cover liabilities of the partners, and not all liabilities that the claimant might have incurred while acting as a salaried partner however incurred.

While not deciding whether or not there was a trust, the judge was inclined to the view that there was. However, even if there was, the defendants’ arguments in respect of fraud and effect of the settlement agreement succeeded.

To what extent is the judgment helpful in clarifying the law in this area?

The case helps to clarify the meaning of a fairly common form indemnity provision contained in an agreement between a salaried partner and the equity partners.

Although the judge did not, given his other findings, need to decide whether the appointments were held on trust, the claimant was given permission to appeal. If the appeal is pursued, then this interesting point is likely to fall to be determined.

Interviewed by Susan Ghaiwal.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Office-holder indemnities and security

A summary procedure under section 212 of the Insolvency Act 1986 and the process for bringing a misfeasance claim

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First published on Lexis®PSL Restructuring and Insolvency

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