New South Wales Supreme Court Interprets Indemnity Clause
June 10, 2022
A recent decision of the New South Wales Supreme Court in PA Putney Finance Australia Pty Limited v Aalders  NSWSC 607 considered the interpretation of several clauses in a confidential Terms of Settlement (Settlement Terms).
The proceedings related to a long running dispute between two brothers, Paul and Adrian Aalders, following the breakdown of a business relationship. The brothers conducted a financing business which involved (amongst other things) leasing vehicles acquired by the business to customers. The key features of the standard rental agreement were:
- The lessor retained title to the leased vehicles, as owner, unless and until another arrangement was made.
- Unless expressly determined, if the lease continued beyond the minimum term, the customer was obliged to continue paying rent.
- There was no term entitling the customer to acquire ownership of the leased vehicles.
Notwithstanding the rental agreement concerned hiring vehicles, Adrian routinely induced customers to enter rental agreements by a pre-contractual representation, by or on behalf of the business, that the vehicle the subject of the rental agreement could be purchased by the customer at the end of the minimum term of the lease, for a payment equal to 10% of the initial cost or original purchase price.
In February 2019, shortly after the brothers terminated their business relationship, Adrian commenced proceedings against Paul’s company, Putney Finance Australia Pty Ltd (formerly Anzax Finance Australia Pty Ltd) and others. The confidential Settlement Terms resulted from these proceedings.
The dispute before the New South Wales Supreme Court related to the plaintiffs seeking to enforce their rights arising from the Settlement Terms. Relevantly, the plaintiffs sought to enforce an indemnity under clause 6 relating to liabilities owed to customers. Customers were told by Adrian, on behalf of the business, that there was the option to purchase the leased vehicle at the end of the lease for 10% of the purchase price.
Clause 6 of the Settlement Terms stated:
Adrian Aalders and Alders Finance agree to indemnify Paul Aalders, Sue Aalders, Anzax Finance Australia and Anzax Custodians (with such indemnity to be embodied in a written agreement) from any past, present or future liability (including any liability for legal costs) to any person, body or entity in respect of, concerning or arising out of the representations made by Adrian Aalders to customers of Anzax Finance Australia and Anzax Custodians that they may purchase vehicles the subject of rental agreements at 10% of the initial cost or original purchase price. The indemnity is to extend to any past, present or future liability, whether or not the facts or law giving rise to such actual or potential liability are known at the date of execution of the indemnity…
In finding for the plaintiffs, Lindsay J held:
- when clause 6 is read as a whole, in the context of the Settlement Terms, it provides for an indemnity against loss arising from a customer’s entry into a rental agreement relying upon a pre-contractual 10% purchase representation;
- the loss the subject of indemnification was a loss from any past, present or future liability (including liability to legal costs) to any person, body or entity in respect of, concerning or arising out of representations made by Adrian to customers of Putney Finance;
- the representations the subject of the indemnity were representations that a customer “may” purchase the vehicle the subject of a rental agreement at 10% of the initial cost or original price of the vehicle;
- the indemnity was agreed to extend to past, present or future liability, regardless of whether the facts giving rise to such actual or potential liability were known at the date of execution of the Settlement Terms;
- the indemnity did not cease to operate if, as Adrian alleged, there was a systematic practice of making pre-contractual 10% purchase representations that were approved by Paul; and
- accrual of a cause of action under clause 6 of the Settlement Terms was not contingent upon a demand being made by the parties entitled to the benefit of the clause.
This decision reaffirms the well-known approach courts adopt when construing agreements, such as the Settlement Terms, that the rights and liabilities of the parties to a contract are assessed objectively, and in light of what a reasonable businessperson would have understood the terms of the contractual document to mean. Lindsay J endorsed the summary of the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 that construing an agreement necessarily requires not only consideration of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the agreement.
His Honour in this instance was not required to consider any extrinsic material other than the purpose of the agreement, which was to allow the two brothers to sever their business relationship. The judgment instead endorsed Ward J’s earlier interpretation of the agreement in Aalders v PA Putney Finance Australia Pty Ltd (formerly Anzax Finance Australia Pty Ltd) and Ors  NSWSC 756. Her Honour in the earlier judgment adopted the same principles of construction as Lindsay J, and primarily noted that, since the settlement document was prepared and finalised quickly, textual construction of clauses must be treated with caution.
The full judgment can be found here.