A couple took out bank facilities to finance the purchase of their bakery and the lease of its equipment. The lease was not with the bank but with a third party which the bank had agreed to indemnify in return for a counter indemnity from the borrowers.
The borrowers argued that a representation was made by the bank to the effect that the bill facility would be rolled over at the end of the initial three year term, for another three years, if there was no default. The bill facility stated that it was a three year term.
The court found that the bill facility as the main contract was quite inconsistent with the terms of the alleged collateral contract and dismissed the claim as hopeless.
The court found that the lessees were in default and the third party was entitled to terminate and demand all amounts due.
The bank was required to indemnify the third party for any loss as a consequence of the lessees not paying and the lessees were required in turn to indemnify the bank.
The lessees claim that the third party had made no demand upon the bank under the indemnity in its favour and hence the bank’s obligation and the lessees’ obligation to indemnify had not arisen.
The court found that as the bank accepted liability, the lessees’ obligation was triggered because they agreed to pay the bank a sum equal to their liability. The claim failed.