'Hypothetical' indemnification

The appellant, Mr Padden, a financial adviser, sold his business to the respondent, Arbuthnot, but continued to provide financial advice as its employee. In that capacity, he advised a client, Mrs P, to pay £1.5m into a bank account and he agreed with Mrs P that he would invest £800,000 of that sum in insurance bonds. When Mrs P discovered that Mr Padden had not done so, but had treated the money as his own, Mrs P issued proceedings and froze his assets. She subsequently accepted a settlement proposal from Mr Padden and a compromise agreement was signed.

Arbuthnot also issued proceedings against Mr Padden and obtained a declaration that Arbuthnot was entitled to be indemnified by Mr Padden in respect of any liability to Mrs P. Damages for loss of commission that Arbuthnot would have earned on the insurance bonds were also awarded.

The Court of Appeal dismissed Mr Padden's argument that the judge did not have jurisdiction to make a declaration that related to a hypothetical situation. The court found this was not a situation where there was only a remote prospect that Mrs P might issue proceedings against Arbuthnot, albeit that a compromise had been reached between her and Mr Padden.

COMMENT: Where the interests of justice and the overriding objective of the Civil Procedure Rules make it appropriate to do so, the court should exercise its discretion to make a declaration of a right to be indemnified against a possible future claim. This is more likely to be the case where the court is asked to consider real issues based upon established facts and where there is a practical requirement for making the declaration. - Julian Smart, BLM Birmingham

- These law reports are contributed by insurance law firm Berrymans Lace Mawer (http://www.blm-law.com)