Euler Hermes UK Plc v Apple Computer BV

This is an appeal by the claimant, Euler Hermes UK plc (“Euler”), against the judgment of His Honour Judge Mackie Q.C. sitting as a Deputy Judge of the Commercial Court dismissing its claim for damages against the defendant, Apple Computer BV (“Apple”).

Euler is an insurance company which specialises in insuring credit risks. Apple is a well-known manufacturer of computers which sells its products throughout the world. On 1^st June 1999 Apple entered into a policy of insurance with Euler in respect of losses resulting from the failure of trade debtors to pay amounts due from them. The policy, which was placed through the brokers AON, originally covered the period from 1^st June 1999 to 30^th September 2000, but was later extended to 31^st December 2000. Its terms included the following:

“We agree that:

(i)

we will indemnify you up to the Insured Percentage of the INSURED LOSS specified in the Schedule if any INSURED BUYER fails to pay you any INSURED DEBT by reason of their INSOLVENCY or PROTRACTED DEFAULT . . . . .

. . . . . . . . . . . . . . . .

2.

YOUR OBLIGATIONS

(ii)

You will take all practicable measures available to you to prevent any loss arising (to you and/or us) and should any loss arise to minimise it.

(iii)

After we have made a claim payment to you in respect of an INSURED BUYER you will continue to take all practicable measures to collect or realise or apply any SALVAGE and if required by us you will assign the relevant INSURED DEBT to us and we shall account to you for any uninsured proportion of any recoveries.

3.

NOTIFICATION AND CONSULTATION

(ii)

If you have reason to believe that an INSURED BUYER is unable or is likely to be unable to perform or comply with his obligations to you . . . . you must notify us immediately . . . .

. . . . . . . . . . . . . . . .

In all the above cases you must

. . . . . . . . . . . . . . . .

(c)

take all practicable measures available to you to prevent or minimise any loss in respect of the INSURED BUYER;

(d)

continue to take all prudent and reasonable steps which we may require in connection with any loss which you may have incurred or may be likely to incur .

Your strict compliance with the terms of Condition 3 is a condition precedent to our liability.

13.

CLAIMS

. . . . . . . . . . . . . . . .

Subject to the provisions of the POLICY we will pay to you the insured percentage of the INSURED LOSS. Payment will be made:

. . . . . . . . . . . . . . . .

(b)

in the case of PROTRACTED DEFAULT within 3 months from the date on which PROTRACTED DEFAULT has occurred, or the receipt by us of a claim from you, whichever is the later, provided however that the period of 3 months shall not run for the purposes of a claim payment while:

(1)

. . . . . . . . . .

(2)

the INSURED BUYER claims that he is entitled to withhold payment of all or any part of the INSURED DEBT and we are satisfied that a dispute exists between you and the INSURED BUYER which has not been resolved by arbitration or by legal proceedings; . . . . . .

EXCLUSIONS

We shall not be liable for any losses where

. . . . . . . . . . . . . . . .

5.

there is a dispute between you and the INSURED BUYER

. . . . . . . . . . . . . . . .”

The definition section of the policy provided as follows:

“9.

PROTRACTED DEFAULT

There is “PROTRACTED DEFAULT” when an INSURED BUYER having accepted delivery of goods has failed to pay to you any part of an INSURED DEBT relating to such goods at the end of a period of 90 days after the due date . . . . . .

12.

INSURED LOSS

. . . . . . . . . . . . . . . .

(ii)

In the event of PROTRACTED DEFAULT the “INSURED LOSS” shall be so much of any INSURED DEBT as shall not be in dispute less any interim payments and recoveries.”

The schedule to the policy identified the countries to which it related, which included Saudi Arabia, and contained a number of amendments and additions to the standard policy terms. Among these was an aggregate first loss clause under which Apple undertook to bear the first US$140,000 of losses falling within the terms of the policy. There was also a profit-sharing clause under which Apple had an option to obtain a rebate of premium if losses during any completed period of cover fell below a certain level, but at the price of foregoing the right to make any further claim in respect of losses occurring during that period. The option had to be exercised within 12 months of the expiry of the period of cover. In this case there was a single continuous period of cover running from 1^st June 1999 to 31^st December 2000.

Apple has been doing business in Saudi Arabia for over 20 years. Until 30^th September 2000 it employed as its distributor an enterprise known as Jeraisy Tech (“Jeraisy”) which carries on business in Riyadh. It appears that the sole proprietor of the business is Sheikh Abdulrahman Al-Jeraisy who is a prominent and influential member of the local business community. The agreement between Apple and Jeraisy did not give Jeraisy exclusive rights to distribute Apple’s products in Saudi Arabia, but for a long time Apple did not appoint any other distributor and so for many years Jeraisy enjoyed the ability to market its products free of competition. That position came to an end in November 1999 when Apple appointed another distributor.

In the late summer of 2000 Apple had become so dissatisfied with the performance of Jeraisy that it decided not to renew its distributorship agreement which was about to come to an end. Accordingly, on 29^th August 2000 it gave notice to Jeraisy that it would not be renewing the agreement when it expired on 30^th September. It is common ground between the parties to the appeal that it was entitled to do so and that the agreement therefore came to an end on that date. The agreement was governed by Dutch law and provided for all disputes under it to be determined by the courts of Utrecht. It did not provide for any payment to be made to the distributor on its expiry.

Jeraisy did not take this challenge to its position lying down. It made a vigorous protest and claimed that it was entitled to receive compensation for the termination of its distributorship. In support of that it withheld payment of invoices from Apple which fell due in September and October 2000. By the end of the year a total of about US$563,468.32 was outstanding and on 29^th January 2001 Apple submitted through AON a claim under the policy in that amount for a loss caused by protracted default.

The claims handler who dealt with the matter for Euler was Mr. Kirkby-Bott. His first response was to ask for further information and as a result the position was discussed at a meeting in Paris on 13^th February attended by Mr. Luddington and Mr. Morris on behalf of AON and Mr. Wahl and Ms Perelta on behalf of Apple. At that meeting Mr. Wahl explained how the claim had arisen. He said that Jeraisy did not dispute the invoices as such, but had made it clear that it would not pay them until its claim for compensation had been settled. He gave the brokers to understand that Apple would begin legal proceedings to recover the debt in the very near future. Mr. Luddington reported back to Mr. Kirkby-Bott the next day, telling him that Apple was going to start proceedings “this week”.

There clearly were those within Apple who favoured legal proceedings against Jeraisy, but Mr. Peter Davies, its senior lawyer in Europe, was doubtful whether that was a sensible course to take. In an internal e-mail sent on 5^th March he expressed the view that proceedings in Saudi Arabia might well turn out to be costly, protracted and uncertain of success. He was concerned about the demands they would make on management time; he was also concerned that they might provoke a counterclaim by Jeraisy for compensation which it might not otherwise be minded to make. He argued strongly in favour of resolving the dispute by other means. At that stage, therefore, although Euler had been told more than two weeks earlier that proceedings were imminent, no steps had been taken in that direction and it was uncertain whether they would be.

On 14^th March 2001 Mr. Kirkby-Bott analysed the claim and prepared a recommendation for the head of the claims department, Mr. Moffat. He recommended that Euler should accept liability in principle for a loss of US$396,346.21, after deducting from the gross figure a small amount relating to some disputed invoices and the amount covered by the aggregate first loss clause. He suggested that liability should be accepted in principle only, subject to conclusion of the legal action which he thought had been, or was about to be, started to determine whether the termination of the distributorship agreement had been valid. Mr. Moffat agreed, but added two further reservations making acceptance of liability subject to legal action to collect the debt and a decision on the profit share arrangements. This was an internal document, however, and its contents were not communicated to AON or Apple.

On the same day Euler wrote a letter to Apple addressed to Mr. Luddington of AON informing it of its acceptance of the claim. This letter and a later letter in substantially identical terms lie at the heart of the case and it is necessary, therefore, to refer to it at length. It read as follows:

“We have now completed the assessment of your claim and are pleased to confirm our acceptance as detailed in our settlement calculation below.

Gross Debt USD563,468.32

Less disputes USD 27,122.11

USD536,346.21

Less 1999 AFL USD140,000.00

USD396,346.21

We confirm that our cheque in settlement will be forwarded to you subject to our receipt and acceptance of the following:

We require that the action being taken to determine the validity of the decision to not renew the distributorship with Jeraisy is concluded in favour of Apple Computer International and that Jeraisy are found to be indebted to Apple in the sum of USD563,468.32.

A letter of undertaking is required from you stating that in the event of Jeraisy being ordered to pay to you the amount due you will take all necessary action to recover the sums due. A specimen wording for the letter is attached.

We also require that a decision be made in respect of the Policy Profit Share agreement.

We would remind you that premium, salvage and declarations, if applicable, must all be up to date before any proposed payment can be released.

Should you have any questions regarding the above, please do not hesitate to contact us quoting the claim number shown.”

Enclosed with the letter was a specimen letter of undertaking in the following form:

“Specimen Letter of Undertaking to continue collection action

To EULER Trade Indemnity plc

Dear Sirs,

Re Claim no. 203613 Jeraisy Computer & Communications Services Co.

We accept the conditions attached to this offer of settlement of our claim in respect of this customer, namely that we confirm that with regard to the proposed settlement to us in respect of our claim in the sum of USD396,346.21 we undertake the following:

1.

We will continue to take action against the debtor Jeraisy Computer & Communications Services Co. to recover the outstanding debt in full.

2.

In the event that the debtor enters into or is placed into insolvency we will pursue full confirmation of debt.

3.

In the event that subsequent confirmation of debt is for a lesser amount than the amount forming the basis of the on account payment, we will immediately account to EULER Trade Indemnity plc for any difference.

4.

We will continue to account to EULER Trade Indemnity plc for any salvage payable by us or by our principal as appropriate under the Terms and Conditions of our Policy.

We trust the above is acceptable to EULER Trade & Indemnity plc and look forward to receiving their cheque in settlement of our claim.”

AON did not pass this letter or its enclosure to Apple because shortly after it was received Apple produced some further information which had a bearing on the amount of the claim and the matter had to go back to Mr. Kirkby-Bott for reconsideration. So as far as Apple was concerned, the matter remained in Euler’s hands. Within Apple itself there was still disagreement about the best way of persuading Jeraisy to pay. In the end letters were written but no steps were taken to commence legal proceedings. The letters produced nothing beyond confirmation from Sheikh Al-Jeraisy that he did not dispute the invoices and had even ordered the money to be paid into an escrow account, but that he did not propose to make any payment until the dispute over the termination of the distributorship agreement had been resolved.

On 10^th May, having reviewed the additional information, Mr. Kirkby-Bott recommended that Euler should offer to settle the claim on the same terms as before, but at the slightly higher figure of US$410,954.66. The next day he spoke to Mr. Luddington to tell him that Euler would accept the claim in that amount on the terms of its previous letter; he also wrote another letter to Apple, again addressed to Mr. Luddington, in precisely the same terms as that which he had written on 14^th March, save for some changes in the calculation of the amount to be paid. That letter presumably reached AON on 12^th May.

However, Mr. Luddington did not let the grass grow under his feet. He still had the letter of 14^th March with its enclosure in his file and as soon as he had heard from Mr. Kirkby-Bott on 11^th May he sent a fax to Mr. Wahl telling him of Euler’s decision and enclosing a copy of the specimen letter of undertaking which he amended by hand to reflect the revised settlement figure. In his fax he asked Mr. Wahl to draft a letter on Apple’s headed paper containing the wording set out in the specimen and return it to enable him to obtain payment. Mr. Wahl did as he was asked. A letter of undertaking in the form requested by Euler was drafted, signed and returned by Apple direct to Euler on 17^th May. At that stage Apple had still not received Euler’s letter of 11^th May; indeed, no one at Apple saw it until it emerged in the course of these proceedings. Payment of the settlement amount followed soon after.

Over the following months Apple continued to debate the best way of obtaining payment from Jeraisy. It did so knowing of the terms of the letter of undertaking, but in ignorance of the terms of the covering letter. In November 2001 it obtained advice from a firm of international commercial lawyers in Riyadh about the prospects of ultimately succeeding in recovering the money from Jeraisy by legal proceedings and the potential pitfalls of attempting to do so. There was further correspondence between the parties which failed to advance matters and in the end, although it sent what Mr. Wahl described as a “threatening letter” to Jeraisy in June 2002, Apple came to the conclusion that it was not in its commercial interests to start proceedings. The matter was therefore quietly dropped. However, in Euler’s view Apple’s failure to pursue proceedings against Jeraisy involved a breach of the settlement agreement or of the policy itself. It therefore brought its own proceedings against Apple claiming to recover by way of damages the amount it had paid to settle the claim.

The matter was tried by His Honour Judge Mackie Q.C. He held that the exchanges in May 2001 had given rise to a binding agreement between Euler and Apple which incorporated the terms set out in the letter of undertaking but not those of the covering letter which were not intended to have contractual effect. He held that the undertaking by Apple that it would continue to take action against Jeraisy to recover the outstanding debt in full meant no more than that it would continue to take steps to collect the debt as envisaged by the policy. In his view that meant taking such steps as were reasonable from Apple’s perspective and that, having regard to the amount of money involved and the uncertainties of taking proceedings in a foreign jurisdiction, Apple’s decision not to take legal proceedings against Jeraisy could not be regarded as unreasonable. In the light of that decision it was unnecessary for him to make findings about the loss, if any, that Euler had suffered as a result.

The parties accepted that a binding agreement had come into existence between them as a result of the correspondence to which I have referred and the payment by Euler of the claim, but they did not agree upon its terms. Euler maintained that the terms set out in its letter of 14^th March and repeated in its letter of 11^th May (to which I shall refer as “the covering letter”) formed part of that agreement. Apple, on the other hand, contended that only the terms of the letter of undertaking were contractually binding.

The argument turned entirely on the language of the covering letter and the letter of undertaking. Although Apple had not seen either of the covering letters at the time it signed and returned the letter of undertaking, Mr. Popplewell Q.C. quite rightly accepted that since AON was acting as its agent to receive communications from Euler, Apple must be treated as having been aware on 11^th May of the contents of the letter of 14^th March. When Mr. Kirkby-Bott spoke to Mr. Luddington on 11^th May to make a fresh offer of settlement he made it clear that it was on the same terms as that previously made in March, apart from the amount involved. So there is no dispute but that the position is the same as if AON had sent Apple the letter of 11^th May together with the specimen letter of undertaking.

Having considered the terms of the covering letter and the letter of undertaking, the judge held that only the terms set out in the letter of undertaking were intended to have contractual effect. In reaching that conclusion he was strongly influenced by the fact that the letter of undertaking makes no reference to other correspondence and that its language, as he saw it, suggested that it was meant to be exhaustive. That reflected what he thought the insured would expect. He thought that the letters of 14^th March and 11^th May had been drafted in loose and potentially ambiguous language of a kind that might be acceptable in a covering letter but was not appropriate to an offer of a series of terms for acceptance. He noted that Apple had not been asked to sign and return a copy of the covering letter to signify its agreement to its contents.

Like the judge, we were treated by counsel to an exhaustive linguistic analysis of these documents as well as to submissions of a broader nature directed to the commercial context in which they came to be written. One might well have expected that in a matter of this kind the documents themselves would be constructed with the care and precision that would enable their meaning to be gathered without difficulty or doubt, but unfortunately that is often not so and is certainly not the case here. In my view, therefore, it is all the more important to understand the commercial context in which these letters came to be written and to read them with that in mind.

It is convenient at this point to deal with one matter which was said to be of relevance to the question of construction, namely, whether at the time the letters were written Euler had become liable to settle Apple’s claim. The claim was presented to Euler on the basis that the debts to which it related had all fallen due by the end of October 2000, at which time Jeraisy had not sought to dispute the amounts due as such. By 29^th January, therefore, the debts were 90 days overdue and there was on the face of it a protracted default within the meaning of the policy. However, by virtue of clause 13 Euler is entitled to withhold payment of a claim for up to 3 months and by clause 13(b)(2) that period ceases to run while the buyer claims that he is entitled to withhold payment and Euler is satisfied that an unresolved dispute exists between the insured and the buyer.

Mr. Popplewell Q.C. submitted that in definition 12(ii) and Exclusion 5 the word “dispute” is used to refer to a dispute as to the existence of the debt and that the same meaning is to be given to it in clause 13(b)(2). He therefore submitted that since the debt itself had never been challenged by Jeraisy, payment had already fallen due under the policy at the time when the parties entered into the settlement agreement. Mr. Railton Q.C. accepted the first part of that argument, but submitted that the “dispute” to which clause 13(b)(2) refers must be something other than a dispute about the debt itself because in the event of a protracted default the insured loss is limited by clause 12(ii) of the definition section to any undisputed part of the debt.

I agree with Mr. Popplewell to this extent, that in the absence of any indication to the contrary one would normally expect any given word to be used in the same sense wherever it is found in the document. However, a common word such as “dispute” is often used as part of a larger expression and, when it is, the expression of which it forms part has to be read as a whole. In definition 12 (ii) it forms part of the expression “so much of any insured debt as shall not be in dispute” which might be said to direct attention to the debt itself, rather than any extraneous reasons for refusing to pay it, although even in this context the expression is not without some ambiguity. The same cannot be said of Exclusion 5, however, which it is more difficult to read as being limited to disputes about the existence or amount of the debt itself and as excluding any genuine dispute as to whether it has been discharged by set-off or by operation of law or is irrecoverable for some other reason. In clause 13(b)(2) the word is used as part of yet another expression, namely, “the insured buyer claims that he is entitled to withhold payment . . . . . and we are satisfied that a dispute exists between you and the insured buyer”. Reading that expression as a whole, I think it is clear that a claim to a right to withhold payment extends beyond merely disputing the existence or amount of the debt and cannot be limited as Mr. Popplewell would suggest by the use of the word “dispute”. Viewed in the context of the policy as a whole, I am not sure that definition 12(ii) is to be construed as narrowly as the parties were prepared to accept, but whatever meaning is to be given it (a matter on which it is unnecessary to reach a final conclusion), I do not think that clause 13(b)(2) can be confined to disputes relating to the existence or amount of the debt. In my view any claim by the debtor to a right to withhold payment is sufficient to interrupt the running of the 3 month period.

In the present case that period would not have expired until 29^th April and in any event, although by 14^th March Jeraisy had not challenged the outstanding invoices as such, it had asserted in a general way that it was entitled to receive compensation for the termination of the distributorship and was withholding payment on those grounds. In my view that was sufficient to render the debt disputed within the meaning of the policy and therefore the claim had not become payable at the time the settlement agreement was made. However, I do not think that has much bearing on the questions we have to decide. Apple did not suggest that the agreement was not binding for want of consideration and, whatever the parties’ own views were about whether the claim was payable, there is no evidence that they had a common understanding of the position which could properly affect the construction of the documents. What in my view is more important is the fact that both sides knew that there was a dispute over the termination of the distributorship agreement and that Euler had been told that Apple was about to start legal proceedings to recover the debt.

Although the letters of 14^th March and 11^th May are couched in terms of an acceptance of Apple’s claim, each of them is in substance an offer to settle the claim in the amount stated. When an insurer makes an offer in correspondence to settle a claim one would normally assume that the letter in which the offer is put forward was intended to have some legal significance, if only because it is the very document in which the offer is contained. It may, of course, be apparent from the terms of the letter that the terms of the proposed agreement are all contained in an enclosure, but even in a case of that kind the letter will be intended to have significance as the vehicle for the offer.

In the present case this assumption is reinforced both by the terms of the covering letter and by the terms of the specimen letter of undertaking that was enclosed. The covering letter itself begins by setting out Euler’s offer of settlement with details of how it had been calculated. That information was not contained in the letter of undertaking, although the amount of the offer was stated in it. The letter then continues by setting out three requirements, subject to “our receipt and acceptance” of which the amount in question would be paid. There is no doubt that the wording of this part of the letter is inept because only the second of the three requirements which relates to the letter of undertaking concerns something that Euler could receive and none of them involves anything that Euler might accept. Nonetheless, in view of what followed I do not think there can be much doubt that the writer was intending to set out certain requirements which he intended to impose on Apple in return for the proposed payment.

Each of the following three paragraphs is couched in terms of a requirement. That itself is significant, since it would hardly have been drafted in that way if it had not been intended to have some legal significance. The first is directed to the determination of the dispute that was being put forward by Jeraisy as the ground for not paying the debt in question. It will be necessary to consider the language of this paragraph more carefully in a moment, but one can see that its broad intention is to ensure that the dispute is resolved in Apple’s favour. That is consistent with a policy which provides cover in respect of the non-payment of undisputed debts, but not the non-payment of disputed debts. The second requirement is for a letter of undertaking to take all necessary steps to recover any sums that Jeraisy might be held liable to pay. Again, that is consistent with the terms of the policy, particularly those relating to salvage. The third requirement relates to the profit share agreement. That was a matter that it was appropriate to resolve having regard to the size of the claim. Although they are not easy to construe, each of those paragraphs was on the face of it intended to have legal effect. If it was not, there would have been no point in including it in the letter.

The letter of undertaking is expressly referred to in the covering letter as the second of the three requirements and therefore on the face of it is ancillary to the letter itself. Nonetheless, it is worded in a way that enabled Mr. Popplewell to argue with some force that it was intended to embody the whole of the terms of settlement. His argument drew its strength mainly from the use in the opening sentence of the words:

“We accept the conditions attached to this offer of settlement of our claim in respect of this customer, namely . . . . . . ” (emphasis added)

before setting out the four numbered undertakings. These words are, of course, apt to identify the entirety of the conditions attached to the offer, but as with the rest of these documents they have to be read in context.

The judge appears to have been impressed by the contrast between what he regarded as the formality and apparent self-sufficiency of the letter of undertaking and the loose and potentially ambiguous language of the covering letter, but each document provides part of the context in which the other has to be read and understood. Moreover, although the letter of undertaking contains formal undertakings, it is not suitable to stand on its own as an offer from the insurers to settle a claim. The fact that the covering letter is poorly drafted does not in my view provide sufficient grounds for treating it as not intended to have legal significance if the language the writer has used indicates otherwise. In this case the expressions “we require” and “is required” indicate quite clearly, in my view, that the writer is intending to impose obligations of some kind on Apple, not merely making observations that Apple is free to disregard if it chooses to do so. I think that the expression “subject to our receipt and acceptance of the following”, which I agree is not really apposite in the context of what follows, was probably meant to read “subject to our receipt of your acceptance of the following”, but how it came to be worded as it is does not matter. In the end the question has to be decided as much by reference to the documents as a whole as to individual phrases within them.

I have come to the conclusion that the judge was wrong on this point and that the covering letter was intended to qualify Euler’s offer to settle the claim by requiring Apple to accept the three requirements to which it referred. It is quite true, as the judge pointed out, that there was no mechanism in the letter by which Apple could specifically confirm its acceptance of those requirements, but I do not think that there is much doubt that providing a letter of undertaking in the terms requested by Euler and accepting payment was sufficient to communicate Apple’s acceptance of the terms.

The main debate surrounding the meaning of the settlement agreement was whether the reference to “action” in the covering letter and clause 1 of the letter of undertaking includes, or falls short of, legal action. The specimen letter of undertaking sent to Apple was headed “Specimen Letter of Undertaking to continue collection action” and there was evidence before the judge that Euler itself drew a distinction between “collection action”, by which it meant persuasion of all legitimate kinds short of legal proceedings, and “legal action”, by which it meant just that. Mr. Popplewell submitted that AON was aware of that distinction and that Apple must accordingly be treated as having been aware of it also. I am prepared for present purposes to assume that that is correct, but I do not think it carries the matter very far. What is more important is to read the documents together in the context in which they were written.

In my view two matters are of particular importance. The first is that by the time the letter of 14^th March was written everyone knew that there was a dispute between Apple and Jeraisy over the termination of the distributorship agreement which Jeraisy was putting forward as grounds for refusing to pay the outstanding debts. The second is that Euler had been told that Apple was about to start legal proceedings in order to obtain payment. Mr. Popplewell submitted that the expression

“we will continue to take action against the debtor . . . . . to recover the outstanding debt in full”

should be read as referring to action short of commencing legal proceedings, but I cannot see why that should be so given that legal proceedings had already been discussed. Moreover, the second clause of the letter of undertaking, which contemplates that Jeraisy might go into liquidation or some other insolvency arrangement, tends to suggest that the parties had legal proceedings in mind. The first of the requirements of the covering letter adds little to that. Leaving aside for the moment its precise nature, I can see no reason for construing it as limited to action falling short of legal proceedings; indeed, the use of the expression “found to be indebted to” (my emphasis) supports the contrary conclusion.

I am aware, of course, that before the judge Euler sought to have the settlement agreement rectified (if its terms were to be found solely in the letter of undertaking) by adding to clause 1 words referring specifically to the commencement and pursuit of legal proceedings against Jeraisy. The judge rejected that claim on the grounds that the evidence was not sufficient to establish any prior common intention that Apple would take action of that kind and there is no appeal against that part of his decision. However, it by no means follows that Euler’s construction of the letter of undertaking is to be rejected. It is not uncommon for parties to a written agreement to have different understandings of the effect of particular words they have used, if they have given the matter any specific thought at all. The court’s task is to determine what they must be taken to have intended having regard to the words they have used and the context in which they came to be written. In the present case I am satisfied for the reasons given earlier that although clause 1 of the letter of undertaking does not contain an unqualified undertaking on the part of Apple to pursue legal proceedings, it is not to be understood as extending only to action falling short of such proceedings.

However, this still leaves for determination the precise nature and scope of Apple’s obligations under the settlement agreement. The judge, who for the purposes of answering this question was confining himself to the letter of undertaking, held that the duty was no greater than that imposed by clauses 2(ii) and 3(2) of the policy which he appears to have regarded as indistinguishable for present purposes. He was therefore primarily concerned with an obligation to take “all practicable measures” to achieve the objective in question, which he held gave rise to an issue of fact in each case having regard to all relevant considerations. It is apparent from his conclusions, however, that he approached the matter on the basis that it was for Apple to determine what measures were reasonably practicable having regard to its assessment of the various legal and commercial implications of taking one course of action rather than another. In this case he found that it was reasonable for Apple not to take legal proceedings against Jeraisy having regard to the amount involved, the risks and uncertainties of legal proceedings in a foreign jurisdiction, the dangers of being drawn into a protracted dispute, the costs likely to be incurred, the waste of management time, the possibility of provoking a counterclaim by Jeraisy and the risk of alienating Jeraisy and other potential business partners.

However, if, as I think, the agreement incorporated the terms of the covering letter, that is a good place at which to start. Mr. Railton submitted that, despite its clumsy language, the first of the three requirements set out in that letter was apt to impose on Apple an obligation to take legal action against Jeraisy since that was the only way in which Jeraisy could be “found” to be indebted to it. Mr. Popplewell, on the other hand, submitted that the inclusion of that paragraph had resulted from a misunderstanding on the part of Mr. Kirkby-Bott about what sort of legal proceedings Apple was considering and that it would be absurd to suppose that Apple should be required to take legal action to establish that it had no liability to Jeraisy in respect of the termination of the distributorship agreement.

Since it was not suggested that both parties were well aware that this part of the covering letter was not intended to have any effect, I do not think that it can be disregarded on the grounds that Mr. Kirkby-Bott was labouring under a misunderstanding when he drafted it. It does not seem to have struck Mr. Luddington as absurd; at any rate, he took no steps to query it with Euler and although the letter eventually reached Apple, it does not appear to have questioned it either. In those circumstances all that can be done is to decide what it means. The paragraph makes no reference to legal proceedings as such, but since Euler had been given the impression three months earlier that legal proceedings were imminent, it cannot be taken to exclude them. Although expressed in terms of a requirement, this paragraph purports to oblige Apple to ensure that the dispute with Jeraisy is resolved in its favour and that its right to recover the debt is established, whether by means of legal action or otherwise.

That seems to me to be consistent with the terms of the policy which, so far as is relevant in this context, provided cover against loss caused by the failure to pay debts that were indisputably due and which entitled Euler to withhold payment of a loss while the buyer was asserting a right to withhold payment of the debt. In effect what Euler was doing in this paragraph was insisting that Apple establish that any loss which it ultimately sustained was the result of nothing more than an unprincipled refusal on the part of Jeraisy to pay its debts. The next paragraph of the letter and the letter of undertaking to which it referred are consistent with that inasmuch as they contain undertakings on the part of Apple to take steps to recover the outstanding debts in full, if necessary by establishing its right to have them taken into account in full in any insolvency.

For these reasons I have reached the conclusion that on its true construction the settlement agreement did oblige Apple to pursue its claim against Jeraisy, by legal proceedings if necessary, to the point at which it had established its right to recover the debts in question and that to the extent that it failed to do so it was in breach of those terms. Whether, as Mr. Railton submitted, that would have been the position under the policy in any event following a settlement of a loss by reason of protracted default does not seem to me to matter. He submitted that in a case of this kind Euler was entitled under the terms of the policy relating to salvage to require the insured to take legal proceedings at its own expense in order to establish whether the debt was payable or not. However, such proceedings could only benefit Euler inasmuch as they would result either in a decision that the debt was not due at all or (subject to problems of enforcement) its recovery. In either case there would be no loss. The provisions of the policy dealing with salvage are complex and I have some doubt whether Euler could require the insured to take action at its own expense which could only benefit Euler itself. However, it is unnecessary to reach a decision on that point in the present case.

Mr. Popplewell submitted that it would be commercially unreasonable to expect an insured in Apple’s position to take proceedings against Jeraisy in Saudi Arabia to recover a sum of this magnitude at the risk of provoking protracted and potentially costly litigation over the distributorship agreement. I can well understand why Mr. Davies should have regarded such a course of action with alarm, but it was not the only course open to Apple. If it thought that its interests were better served by compromising with Jeraisy or (as turned out to be the case) by writing off the debt altogether, it was free to do so. It does not follow, however, that it was entitled to do so at Euler’s expense. It is no answer simply to say that the purpose of credit insurance is to protect the insured from loss when the buyer fails to pay. It is only by examining its terms that one can determine whether a loss has occurred within the scope of the policy and the insurer is liable to pay. If, as was the case here, there was some doubt at the time the claim was paid whether either or both of these conditions had been satisfied, it is perhaps not surprising that the insurer should require that steps be taken to establish that it was indeed liable.

Although it appears that its claim against Jeraisy is not even now time-barred under Saudi law, Apple finally decided in the latter part of 2002 not to take further action of any kind against Jeraisy to recover the outstanding debt or to resolve the dispute over the termination of the distributorship agreement. That may well have been a sensible commercial decision, but in my view it involved a breach of the terms of the settlement agreement. In those circumstances Euler is entitled to recover any loss it has suffered as a result.

In these circumstances it is unnecessary to decide whether, as the judge thought and as Mr. Popplewell submitted, clauses 2(ii) and 3(2) of the policy impose a duty on the insured only to take such steps to obtain payment of the debt as it considers reasonable having regard to all the circumstances affecting it, or whether, as Mr. Railton submitted, they impose on him a duty to take all such measures, viewed objectively, as are reasonable and practicable to achieve that end. All I would say is that, since the clause is intended to benefit Euler as well as the insured, I very much doubt whether the obligation to take “all practicable measures” to prevent or minimise a loss and to realise salvage entitles the insured to take only such steps as it considers to be in its own wider commercial interests.

Since Apple was, as I have held, in breach of the terms of the settlement agreement, it is necessary to consider what loss Euler has suffered as a result. The covering letters did not expressly purport to make the establishment of Apple’s right to recover the outstanding debt a condition of the settlement, but I think that is what Euler intended and the way in which the letter was worded comes very close to achieving the same result. It is important in this context to understand the nature of the obligation imposed by the first of the three “requirements”. Both parties approached the question on the basis that it obliged Apple to pursue legal proceedings against Jeraisy to a conclusion and consequently there was a dispute about the loss that Euler had suffered as a result of Apple’s failure to take proceedings of any kind. Thus, Mr. Railton submitted that Euler’s loss was equal to the full amount paid under the agreement since there was no significant risk that Apple would fail to establish its entitlement to be paid, whether or not Jeraisy succeeded on a counterclaim, and the risks of failing to obtain payment were likewise minimal. Mr. Popplewell, on the other hand, submitted that any proceedings would have been protracted and fraught with uncertainty, both in relation to establishing a right to be paid and in relation to obtaining payment. Accordingly, he submitted that Euler’s loss was modest, if indeed it had suffered any loss at all.

For the reasons given earlier, however, I do not think that the settlement agreement imposed on Apple an obligation merely to take certain action; in my view it imposed an obligation to achieve a stated result. That seems to me to be the natural meaning of the expression

“We require that the action being taken . . . . . . is concluded in favour of Apple . . . . . . and that Jeraisy are found to be indebted to Apple . . . . .”

which is directed not just to the continuance of the action but to its outcome. Mr. Popplewell submitted that it would be absurd for Euler to stipulate for something that was outside Apple’s control, but that overlooks the nature of this policy and the fact that there was known to be an existing dispute between Apple and Jeraisy which was being used as the ground for withholding payment. As I pointed out earlier, in that context it is not difficult to see that by imposing this requirement Euler was seeking to ensure that Apple established that the debt was in fact undisputed and that there was a loss for which Euler was liable to pay. In those circumstances I do not think that it is relevant to enquire into Apple’s chances of establishing its right to recover the debt in full, since it was under an obligation to achieve that result. However, it is still necessary to consider whether, if it had done so, there was any significant likelihood that it would have been unable to enforce payment if it had complied fully with the obligations set out in the letter of undertaking.

Unfortunately, this is not a matter on which the judge made any findings. Both parties had obtained permission to call expert witnesses to give evidence about the administration of justice in Saudi Arabia with particular reference to proceedings to recover commercial debts and the process of enforcing judgment. Each of them had served an expert’s report with a view to calling the maker to give evidence at the trial insofar as there was any disagreement. As often happens there was a fair measure of agreement between the experts, but there remained some significant areas of dispute, one of which was the efficiency of the process in Saudi Arabia for enforcing judgments. Despite that, on the first day of the trial the judge questioned whether it was really necessary to require the experts to attend for cross-examination and as a result the parties agreed that they need not do so, perhaps because they considered that the costs would be disproportionate to the amount in issue.

In the circumstances Mr. Railton invited us to make our own findings by reference to the material before the judge. The difficulty which faces us, however, is the same as that which faced him, namely, that where expert witnesses disagree it is difficult to prefer the evidence of one to that of the other in the absence of cross-examination. However, having regard to the amount in issue in this case, which is not substantial by current commercial standards, and to the costs that would be incurred if the matter were to be remitted for a further hearing on this question, we are prepared to make some findings of our own insofar as we can fairly do so. For reasons which will become apparent, I am satisfied that it is possible to do so within a limited compass.

Euler’s expert, Mr. Andreas Haberbeck, is an English barrister who since January 1991 has practised with various firms of lawyers in Jeddah handling contentious disputes. Although he is not able to appear as an advocate in Saudi Arabia, he has acquired extensive experience of conducting litigation before the Saudi courts, mainly in connection with commercial disputes. In his report he states that the execution of judgments is essentially personal in that the judgment creditor can apply to have the judgment debtor imprisoned until the debt is paid. Arrest in aid of execution is the responsibility of the Civil Rights Department and can prove difficult if the judgment debtor keeps away from both his place of business and his main residence. (He mentions one case in which enforcement took over two years for that reason.) However, he says that in general he has not found it difficult to enforce judgments against individuals. He thinks that Sheikh Al-Jeraisy, who is a well-known businessman, would be unlikely to hide from the officers of the Civil Rights Department in order to avoid payment of the modest sum of US$560,000.

Apple’s expert, Mr. Ian Edge, is also an English barrister. He has made his career in the academic world and at the time he made his report had spent the past twenty-six years as a lecturer at the London School of Oriental and African Studies. During that time he also held posts at a number of other teaching institutions and has appeared as an expert witness of Islamic law at many trials in this country. He does not have experience of practice in Saudi Arabia, but he visits the Middle East regularly and has frequent contact with lawyers there. In his report Mr. Edge says that judgments are not enforced through the courts themselves but though the office of the governor of the province in question through a special security force and that as a result influence can be brought to bear to obstruct enforcement. He says that in his view Sheikh Al-Jeraisy as a prominent businessman would be able to delay execution almost indefinitely and he refers to a particular case with which he was concerned in which execution was delayed for more than three years. However, since that case concerned the execution of a foreign judgment against a company to which the governor himself was connected, it may not be typical.

In my view the experts are in agreement that the procedure for execution of judgment debts takes the form of arrest and imprisonment. The responsibility for that is in the hands of an administrative body acting under the ultimate responsibility of the provincial governor. The only significant points, as it seems to me, on which they are divided are the extent to which judgment debtors can bring personal influence to bear by reason of their connections with high-ranking officials and whether Sheikh Al-Jeraisy would be likely to use whatever influence he has to avoid meeting a judgment against him. Despite some misgivings, I am satisfied having regard to the nature and scope of the dispute that it would be appropriate for us to make findings about these matters.

It was not disputed that Sheikh Al-Jeraisy is a man of great wealth and a prominent member of the Riyadh business community. I think one can therefore discount the possibility that he would avoid his home or his office for a long time in order to avoid paying a sum of this magnitude. I think it would be naive, however, to assume that influence cannot be brought to bear on those who are responsible for enforcement, but I am not persuaded that in general enforcement presents a serious problem. On this question I would prefer the evidence of Mr. Haberbeck who has much greater practical experience of these matters than Mr. Edge.

Whether either expert can provide much assistance on the likely response of Sheikh Al-Jeraisy is open to question and I doubt whether the position would be any better in relation to this particular issue if they had been cross-examined about it since neither of them knows him personally. Much would no doubt have depended on the nature and strength of his personal contacts and on his willingness to be known as a defaulter. Insofar as it is possible to form any view, I think it likely that he would try to delay things for a time but that he would eventually settle the debt. Perhaps it is sufficient for these purposes to say that on the evidence before us I am not persuaded that there is a significant chance that, once obtained, a judgment debt would not have been recovered in full if a determined attempt had been made to enforce it. No question of insolvency arises.

This leads to the conclusion that, if Apple’s right to recover the debt had been established as required by the settlement agreement, payment would have been obtained, albeit after some delay. In that case there would have been no loss and the payment made in settlement of it would have been recoverable. On the face of it, therefore, Euler is entitled to recover damages in the full amount of that payment. However, Mr. Popplewell submitted that Euler could have exercised its rights of subrogation to take proceedings in Apple’s name in mitigation of its loss and, having failed to do so, could not recover from Apple.

In view of the fact that any subrogated claim would have to have been made in Apple’s name and that Apple itself was anxious not to become embroiled in proceedings against Jeraisy, this is hardly an attractive argument. The fact is that neither Euler nor Apple was keen to embark on litigation at its own expense, Apple because it was doubtful of the utility of doing so and because it was concerned about the wider commercial implications, Euler because it considered that it was Apple’s responsibility to establish that there had been a loss for which it was obliged to pay and because it did not want to incur the expense and trouble of doing so.

By agreeing to the terms of settlement Apple effectively promised that it would establish an undisputed right to the debt. That would either lead to there being no loss, if the debt were then paid promptly, or to a loss by protracted default or insolvency, if it were not. In the former case Apple would become liable to repay what it had received in settlement of the claim in order to avoid double recovery; in the latter it would be entitled to retain the payment, but Euler would be entitled to receive whatever amount was eventually recovered from the debtor. Apple’s failure to establish an undisputed right to the debt meant that Euler suffered damage as a result of having paid a loss which it was not bound to pay under the terms of the policy. On the face of it that entitled it to recover damages from Apple for breach of contract. However, if it exercised its right to take proceedings against Jeraisy in Apple’s name, and if, as must be assumed, those proceedings led to the recovery of the debt, it would have recovered no more than it already stood to recover from Apple by way of damages for breach of contract without incurring any expense. In those circumstances I can see no grounds for saying that Euler ought reasonably to have embarked at its own expense on litigation in Saudi Arabia which would have yielded it no practical benefit. It follows that in my view Euler did not fail to mitigate its loss and that it is entitled to recover by way of damages for breach of the settlement agreement the amount paid under that agreement.

For these reasons I would allow the appeal and give judgment for the appellant in the sum of US$410,954.66.

I agree.

I also agree.