Midland was engaged by Grenfell to manage mortgages and investment funds. Midland agreed to indemnify Grenfell against losses suffered as a result of default by borrowers on mortgage loans. The relevant clauses of the indemnity provided:
1.1. This indemnity applies only in respect of losses sustained by the Lender in respect of mortgage loans in the Financial Year set out in schedule as “The Financial Year”.
2.1. The losses to which the indemnity applies are any losses suffered by the Lender during the Financial Year in respect of the principal or the balance of principal of any loan recorded in its books of account and secured by a mortgage over real estate situate in Australia (the “Loans”) arising from a default under the mortgage by the borrower necessitating a sale of the real estate securing the loan to the Lender and after having exhausted all efforts to recover such losses.
A series of near identical indemnity agreements were entered into for the financial years 2003-2007.
Acting Justice Windeyer interpreted the words of the indemnity to mean that liability was conditional upon default giving rise to a loss and that loss arose only after all efforts to recover such losses. His Honour rejected Grenfell’s argument that it could have recourse to the indemnity merely upon default.