The Claimants have alleged that they have suffered personal injury from the use of sofas purchased from a number of suppliers. One of those suppliers is Land of Leather which is now in administration. Land of Leather was insured in respect of product liability by Zurich. The Claimants therefore wish to claim against Zurich pursuant to the Third Parties (Rights against Insurers) Act 1930. Zurich say that they are not liable to indemnify Land of Leather and therefore are not liable to the Claimants. This is the trial of certain preliminary issues between the Claimants and Zurich which may be summarised as follows:

Whether Land of Leather agreed not to pursue any right of indemnity from its suppliers, Linkwise, in respect of any liability for personal injuries which Land of Leather had to the Claimants.

Whether any such agreement is unenforceable on the grounds of lack of consideration.

Whether any such agreement was a breach of condition 3 of the policy of insurance.

If there was no breach of condition 3, whether there was in any event a breach of an implied term of the policy of insurance.

Zurich insured Land of Leather in respect of products liability with a limit of £5m. The Policy contained a number of conditions which provided, so far as material as follows:

In September and October 2007, in response to complaints of skin allergy, Land of Leather decided to stop selling Linkwise products. Stock had to be returned, alternative products had to be provided and adverse media coverage had to be dealt with. This caused Land of Leather to suffer damage to its reputation and to incur expenditure. Land of Leather sought compensation from Linkwise.

In October/November 2007 Mr. Paul Briant, who was the Chief Executive Officer of Land of Leather, took part in discussions with Linkwise concerning Land of Leather’s claim to compensation. He gave evidence before me. He was an honest witness though, unsurprisingly, he did not have a complete recollection of the discussions. His written statement dated 16 December 2009 did not give a detailed account of them. He merely stated that as a result of the discussions “it was agreed that Linkwise would compensate LOL by paying US$900,000 which would be treated as a credit against future orders at the rate of US$150,000 per month for six months.” However, his oral evidence did not suggest that an oral agreement in those terms had been made during his discussions.

In his examination in chief Mr. Briant said that at the meeting Land of Leather was represented by himself, Steve Jenkins, the Managing Director, and Clive Hatchard, the Chief Finance Officer. Linkwise was represented by Mr. Mak (who spoke no English) and his interpreter Mr. Bailey. The meeting took place in Poole, Dorset, at the Land of Leather store. He said that Land of Leather was looking for compensation in the sum of $1m. but that agreement was reached in principle at $900,000. He said that mention was made of it being paid at a rate of $150,000 per month. In cross-examination he said that $150,000 had been discussed but not agreed. He said that he did his best to get a credit note which was “more palatable” for Linkwise. However, it was “left in the air”.

On 8 November 2007 Land of Leather, through their brokers Willis, informed Zurich by email of an invoice to be sent to Linkwise by Land of Leather. Zurich was informed that the invoice was intended to make clear that any payment by Linkwise did not include compensation in respect of personal injury claims. Zurich was asked whether it would prejudice any action they may decide to take. Zurich responded that the invoice wording was “fine” and indicated that they would be redirecting any personal injury claims to Linkwise. Thereafter the invoice, dated 8 November 2007, was issued. It was addressed to Linkwise and read as follows:

The invoice was emailed to Richard Willan of Linkwise Solutions Marketing, the UK agents of Linkwise, on 9 November at 1210. In that e-mail Adrian Goodenough, the Company Secretary of Land of Leather, stated that the invoice was for “immediate settlement as agreed with Paul Briant and Steve Jenkins”.

At 1219 on the same day Richard Willan replied and copied his reply to Steve Jenkins of Land of Leather. He said that “Steve [Jenkins] agreed to summarise the terms of the settlement” and that the key points were:

At 1650 on the same day Steve Jenkins replied to Richard Willan as follows:

On 16 November 2007 Steve Jenkins emailed Richard Willan and asked whether the credit note from Linkwise had been received. On 18 November 2007 Linkwise issued an credit note in these terms:

Mr. Stephen Hofmeyr QC submitted, on behalf of the Claimants, that Land of Leather and Linkwise had reached an agreement that Linkwise would give credit in the total sum of $900,000 by means of 6 monthly credits of $150,000. In support of this submission he relied upon Mr. Briant’s written statement and on the circumstances that Steve Jenkins did not dissent from Mr. Willan’s assertion in the email of 9 November that that was one of the key terms. In the alternative he submitted that the agreement was for immediate payment of $900,000. In support of this he relied on the terms of the invoice and on Mr. Goodenough’s email of 9 November which stated that the invoice was for immediate settlement. In the further alternative he submitted that it was an implied term of the settlement that the sum would be paid within a reasonable time.

Mr. Colin Edelman QC accepted, on behalf of Zurich, that a binding and enforceable agreement had been reached that the claims set out in the Invoice had been settled for the sum of $900,000 but submitted that no express agreement had been reached as to when or how that sum would be paid. In those circumstances there would be an implied term that the sum would be paid within a reasonable time.

The Court has limited evidence before it as to what was agreed in the meeting. There has been no evidence from Linkwise (from either Mr. Mak or Mr. Bailey) or from Steve Jenkins or Clive Hatchard who also attended the meeting on behalf of Land of Leather. However, it is necessary to make findings as to what was agreed and the court must do so on the balance of probabilities on such evidence as it has.

I accept that a binding and enforceable agreement was reached. Although Mr. Briant described it as an agreement “in principle” the issue of the Invoice by Land of Leather and of the Credit Note by Linkwise shows that an agreement had been reached which both parties regarded as binding and enforceable. Whilst it was clearly agreed that Linkwise would provide compensation to Land of Leather in the sum of $900,000 I am unable to accept that an agreement had been reached between Mr. Briant and Mr. Mak that that would be paid by credit of $150,000 per month for 6 months. I accept Mr. Briant’s evidence that it was discussed but not agreed; it was “left in the air”. No mention of it was made in the Invoice or in the Credit Note. If it had been agreed it is likely that it would have mentioned in one or both of those documents. Whilst it was mentioned by Richard Willan in his email of 9 November he did not attend the meeting. Although Steve Jenkins did not take express issue with it in his email of that day in response to Mr. Willan’s email he did say that “the terms of the settlement are on the invoice”. That invoice does not contain any mention of a credit note or of monthly credits of $150,000.

I am also unable to accept that there was an agreement for “immediate” settlement of the sum of $900,000. Whilst that was mentioned by Adrian Goodenough he did not attend the discussions. I consider that no express agreement was reached as to when or how the compensation of $900,000 was payable. Mr. Briant did not give evidence of any such agreement. The Invoice was silent as to when payment was to be made. In the circumstances I consider that it must have been an implied term of the agreement that the sum would be paid within a reasonable time. Such a term must be implied to give business efficacy to the agreement. It is likely that it was contemplated that the payment would be made by way of credit against the cost of future purchases.

After Linkwise issued the Credit Note it seems that no credit was given when Land of Leather next made a payment for sofas supplied by Linkwise. It is not known whether Land of Leather sought credit in a single lumpsum of $900,000 or in an instalment of $150,000. All that was in evidence was Mr. Briant’s unchallenged evidence that “Linkwise did not allow credit to be taken against subsequent deliveries”. It seems likely that this refusal to allow credit to be taken occurred in either December 2007 or January 2008 or both.

Such refusal of credit occurred at a difficult time for Land of Leather. Mr. Briant accepted that the New Year sales figures were down “dramatically” and that at about this time the share price of Land of Leather had fallen by 50% or more. A credit facility from Barclays was also lost and in the result, according to Mr. Briant and I accept, the need for the $900,000 became more pressing.

In February 2008 Mr. Briant was on a buying trip to China and “went to Linkwise’s premises there for a meeting to sort the matter out.” The meeting took place on 10 February 2008 and was also attended by Claudia Chen (Land of Leather’s representative in China) and Steve Dowdall (also of Land of Leather). Representing Linkwise were Mr. Mak and Mr. Bailey together with Richard Willan.

The meeting lasted about 3-4 hours. Mr. Briant made clear that Land of Leather had been put to much expense as a result of the skin allergy complaints and that there had been damage to Land of Leather’s reputation. In support of the latter he produced at the meeting a selection of press cuttings. The press cuttings concerned complaints by customers against Land of Leather. There had been about 20 at that time. Mr. Briant accepted in cross examination that he used the possible claims that might result from such complaints as a negotiating tactic. Although he said in his statement that customer complaints against Land of Leather were not mentioned he agreed in cross examination that they were a “feature” of the discussions but not a “headline item”. They could not be quantified. What was discussed was the damage to Land of Leather’s reputation and the expenses incurred. In particular shipping costs of £80,000 were discussed. Mr. Briant demanded that Linkwise honour the earlier agreement to allow credit against invoices to the extent of US$900,000 by way of compensation. Mr. Briant said that Mr. Mak wanted to renegotiate the agreement.

At the end of the meeting agreement was reached. It was recorded in a typed document prepared by Mr. Bailey and signed by Mr. Briant and Mr. Mak. It provided as follows:

Mr. Briant said that he had been under “massive pressure” to get back some money. He accepted that as a result of February Agreement he had obtained “a structure whereby he was more confident of receiving the money than he was before”. He accepted that he now had a schedule of payments in writing which he could provide to the board or to the bank. He also accepted that by making the February Agreement he was able to maintain the relationship between Land of Leather and Linkwise. The agreement brought to an end (he thought) an unpleasant affair and closed a chapter.

It is Zurich’s case that the general words of release in the second sentence of the February Agreement extended, on the true construction of the February Agreement, to Land of Leather’s claim against Linkwise for an indemnity in respect of Land of Leather’s liability to personal injury claimants. Such release was said to be a breach of condition 3 of the Policy or of an implied term of the Policy.

The Claimants’ case is that on the true construction of the February Agreement the only claims that were released were those set out in the Invoice. They did not include Land of Leather’s claim against Linkwise for an indemnity in respect of Land of Leather’s liability to personal injury claimants. Zurich had approved the release of the claims set out in the Invoice. There had been no breach of condition 3 of the Policy or an implied term of the Policy

Zurich’s argument on construction is simple. The ordinary and natural meaning of the general words of release in the February Agreement is that they are wide enough to cover Land of Leather’s claim against Linkwise for an indemnity in respect of Land of Leather’s liability to personal injury claimants. That is because such claim is “in respect of alleged allergic reactions to their products.” The more restrictive wording of the Invoice, which would not have encompassed such a claim, was not adopted by the parties in the February Agreement and the February Agreement did not refer to the Invoice or incorporate it.

The Claimants’ case is more complicated but is founded on conventional principles of construction. Those principles require the Court to ascertain what a reasonable person having all the background knowledge which would have been available to the parties would have understood the parties to be using the language in the contract to mean; see Chartbrook v Persimmon Homes [2009] 1 AC 1101 at paragraph 14 and ICS v West Bromwich Building Society [1998] 1 WLR 896 at p.912 F - 913 F. Those principles apply to the construction of a release; see BCCI v Ali [2002] 1 AC 251 at para.8, 21 and 26.

Put shortly, the Claimants’ case is that the words “no further claim” in their context mean “no further claim of the type identified in the Invoice”. In support of this construction they say that their construction is consistent with the commercial purpose of the February Agreement and with the relevant background, namely, the clearly defined set of claims agreed in October/November 2007 to be compromised as set out in the Invoice and the fact that before the agreement was reached Land of Leather had not made a claim against Linkwise for an indemnity in respect of its liability to third parties. They further say that the February Agreement was designed to capture the essence of the agreement reached in February rather than to be a complete statement of the parties’ respective rights. Finally they say that the construction suggested by Zurich leads to a commercially unreasonable result and that there is no relevant background that supports the construction suggested by Zurich.

Mr. Hofmeyr accepted that the words “no further claim” were capable of a different meaning. They are capable of meaning “no further claim in addition to the sum of $900,000 mentioned in the first part of the February Agreement”. But he submitted that when regard is had to the matters which I have summarised the meaning which the words “no further claim” would convey to the reasonable person having all the background knowledge which would have been available to the parties is “no further claim of the type identified in the Invoice”.

It is therefore necessary to consider the commercial purpose of the February Agreement. It is tempting to deduce the commercial purpose of the February Agreement from Mr. Briant’s evidence that in circumstances where Linkwise had failed to allow credit to be taken against deliveries of sofas despite what had been agreed he went to Linkwise’s premised “to sort the matter out”, that is, to secure the granting of credit up to the sum of $900,000. However, I consider that so to regard the commercial purpose of the February Agreement would be to view the purpose solely from Land of Leather’s point of view. From Linkwise’s point of view they wished, as Mr. Briant said, to renegotiate the October/November Agreement. They succeeded in at least two respects. Firstly, they obtained Land of Leather’s consent to give credit in instalments of $150,000 per month. Secondly, they succeeded in obtaining an undertaking from Land of Leather to buy $20,000,000 of products in 2008.

The commercial purpose of the February Agreement must be assessed objectively. In my judgment the commercial purpose of the agreement was to resolve, as between Land of Leather and Linkwise, the problems which had arisen for each of them from the complaints received of allergic reactions in respect of sofas purchased from Land of Leather and manufactured by Linkwise. Land of Leather faced the problem that such complaints were causing them financial loss and Linkwise wanted to ensure that Land of Leather would continue to purchase their product. That the commercial purpose was to resolve such problems was indeed reflected in Mr. Briant’s evidence. He spoke of bringing to an end “an unpleasant affair” and “closing a chapter”.

That being the commercial purpose of the February Agreement it does not, in my judgment, assist the Claimants’ case as to the meaning of “no further claim”. For the “unpleasant affair” would not be brought to an end; the chapter would not be closed. There would remain to be resolved any claim by Land of Leather against Linkwise for an indemnity in respect of third party claims for personal injuries. Conversely, the commercial purpose of the February Agreement would be consistent with Zurich’s construction of that agreement. The chapter would be closed, as between Land of Leather and Linkwise.

The relevant background known to both parties included the previous discussions leading to the October/November Agreement, the terms of the Invoice and the terms of the Credit Note. However, I am not persuaded that the reasonable person with access to that background would conclude that the words “no further claim” were intended by the parties to mean “no further claim of the type identified in the Invoice”. The reasons why I am not persuaded of that are:

The parties did not use the narrow description in the Invoice of the type of claims which were to be settled but instead used general words of release. That suggests an intention not to be bound by the narrow description in the Invoice.

To understand the general words of release in the narrow sense identified in the Invoice would, having regard to (i) above, require some words in the February Agreement clearly referring to the Invoice. There are no such words. Reference is made to the Credit Note but that did not contain the limited words of the Invoice.

The relevant background also included the fact that before the February Agreement was reached Land of Leather had not made a claim against Linkwise for an indemnity in respect of its liability to third parties. Although a small number of complaints had been made by customers and claims were contemplated no claim for an indemnity had been made by Land of Leather against Linkwise. (It is clear from the correspondence between Zurich and Land of Leather that Zurich were contemplating redirecting claims to Linkwise but this was not information known to both parties and so is not part of the relevant background.) I am not persuaded that the fact that Land of Leather had not made a claim against Linkwise for an indemnity in respect of its liability to third parties before the February Agreement was reached would be regarded by the reasonable person as a good reason for understanding the general words of release as not applying to such a claim. I am not persuaded of that for these reasons:

The commercial purpose of the February Agreement (see above) suggests that the general words of release were intended to exclude all claims in respect of the alleged allergic reactions to Linkwise’s products save the claim for $900,000.

A prospective claim against Linkwise for an indemnity in respect of its liability to third parties cannot be said (and was not said) to be a claim which Land of Leather did not know or could not know that they had; cf BCCI v Ali [2002] 1 AC 251 at para.17.

It was submitted that the February Agreement was designed to capture the essence of the agreement reached in February rather than to be a complete statement of the parties’ respective rights.

The February Agreement was in writing and signed by both parties, unlike the earlier October/November Agreement. It deals with the sum to be paid by Linkwise, sets out the mechanism and timing of payment, provides for a continuing business relationship in 2008 and provides, in general terms, that no further claims will be made by Land of Leather against Linkwise. It seems to me that it has every appearance of being a complete statement of the parties’ respective rights. Indeed, there is no objective basis on which it can be said that the February Agreement was not a complete statement of the parties’ respective rights.

Mr. Hofmeyr submitted that the construction suggested by Zurich leads to a commercially unreasonable result in that Land of Leather had already agreed to accept $900,000 in respect of giving up the type of claims set out in the Invoice. It would, he said, make no commercial sense for Land of Leather also to give up clams against Linkwise for an indemnity in respect of third party claims for the same sum of $900,000. Put in those simple terms one might agree there was no commercial sense in the suggested agreement. But the reality was not so simple. Land of Leather had agreed to give up claims of the type set out in the Invoice for the sum of $900,000. However, whilst it was an implied term of the October/November Agreement that that sum would be paid within a reasonable time and the Credit Note had been issued there was no fixed time table for such credit to be given. It seems that when the matter was put to the test Linkwise failed to allow credit to be taken against the price of goods supplied. After the New Year sales Land of Leather was in a vulnerable position. The sales had been disastrous and the share price had fallen by over 50%. There was therefore considerable pressure on Land of Leather to obtain payment of the agreed $900,000. It is clear that Land of Leather agreed as part of the price for securing payment of that $900,000 that they would buy $20,000,000 of products from Linkwise in 2008. They had not agreed to this in November 2007 and yet they did in February 2008. Mr. Briant must have considered that it was a price worth paying even though no more than $900,000 was to be paid by Linkwise. I therefore do not consider that the mere fact that Land of Leather did not secure more than the previously agreed sum of $900,000 means that there would have been no commercial sense in agreeing to waive a wider category of claims than had been waived in November in return for the payment of $900,000.

To waive a wider category of claim which included claims against Linkwise for an indemnity in respect of third party claims might be described as a bad bargain in circumstances where there was eventually an “avalanche” of personal injury claims. But, whilst the fact that a particular construction leads to an unreasonable result will be a relevant consideration in ascertaining the meaning of an agreement, the fact that an agreement may be, or prove to be, a bad bargain is not a sufficient reason for supposing that the agreement does not mean what it says; see Wickman Machine Tools v Schuler [1974] AC 235 at p.251 and Chartbrook v Persimmon Homes [2009] 1 AC 1101 at para.20.

Finally, it was suggested that there was nothing in the relevant background that supported the construction suggested by Zurich. I disagree. The commercial purpose of the February Agreement, namely, to resolve the problems between Land of Leather and Linkwise caused by the allegations of allergic reactions, supports the construction suggested by Zurich. That commercial purpose emerges from the background to the February agreement, including the failure of the October/November Agreement to resolve those problems.

I am therefore not persuaded that a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the words “no further claim” in the February Agreement to mean “no further claim of the type identified in the Invoice”. Rather, I consider that a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using those words to mean “no further claim in addition to the sum of $900,000 mentioned in the first part of the February Agreement”. That is the ordinary and natural meaning of those words in the context in which they are found in the February Agreement, namely, in the second sentence following the first sentence. It is also the meaning suggested by the commercial purpose of the February Agreement and the background to it. The alternative meaning suggested by the Claimants is derived from the terms of the Invoice but the terms of that Invoice are not mentioned in the February Agreement. In contrast to the limited words of release found in the Invoice the February Agreement uses general words of release. I accept that, in the context of the “avalanche” of personal injury claims which fell on Land of Leather the February Agreement may have proved to be a bad bargain but I am not persuaded that the result of Zurich’s construction is so unreasonable that it cannot be the meaning which a reasonable person having all the background knowledge which would have been available to the parties would have understood to be the meaning of the language of the February Agreement.

The Claimants contend that there was no consideration for the February Agreement. In essence what is said is that prior to the February Agreement Linkwise was already obliged to pay $900,000 to Land of Leather and in return Land of Leather had given up the claims described in the Invoice. If, in the February Agreement, Land of Leather also gave up any claim for an indemnity in respect of third party claims brought against Land of Leather, Land of Leather received no further consideration for that waiver.

On my findings of fact there was further consideration flowing from Linkwise to Land of Leather, namely, a promise to pay the sum of $900,000 by way of credit notes in the sum of $150,000 per month for 6 months. Prior to the February Agreement no such structured credit arrangement had been agreed. There was merely an implied promise to pay $900,000 within a reasonable time. In my judgment the structured credit agreement was good consideration and is not prevented from being so merely because the global sum to be paid remained the same.

I have reached that conclusion on conventional grounds, that is, without reference to the decision of the Court of Appeal in Williams v Roffey Bros. [1991] 1 QB 1. If, however, the correct analysis is that Linkwise suffered no detriment because Linkwise was already obliged to pay $900,000 and had promised to pay no more, then I would hold that there was nevertheless good consideration flowing from Linkwise because the February Agreement provided Land of Leather with a “practical benefit” (per Glidewell LJ at p.16A) or “advantage” (per Russell LJ at p.19 D-E) or “commercial advantage” (per Purchas LJ at p.22H) in that before the February Agreement Land of Leather could not be sure when they would receive the $900,000 whilst after and as a result of the February Agreement Land of Leather had an agreement that they would receive that payment in 6 monthly payments of $150,000; see Chitty on Contracts Vol.1 30^th.ed. para.3-037 and 3-068. It was plain from Mr. Briant’s evidence that he regarded that as a commercial benefit to his company. It gave him more confidence that the sum of $900,000 would in fact be received. Although counsel for the Claimants contended that this could not properly be regarded as a practical benefit the court should be slow to say that that which a business man says is a benefit is not; see Williams v Roffey Bros. at p.21 E-H per Purchas LJ.

For these reasons I am satisfied that the February Agreement is enforceable.

I have already quoted condition 3 of the Policy. For ease of discussion it may be broken down into the following elements:

Two prohibitions on the insured:

Not to compromise or settle any claim or admit liability.

Not to give any information or assistance to any person claiming against him.

Two permissions for the insurer:

To have conduct and control of all proceedings in respect of any claims for which the Insurer may be liable under the Policy.

To use the name of the Insured to enforce for the benefit of the Insurer any order made for costs or otherwise or to make or defend any claim for indemnity or damages against any third party or for any other purpose connected with the Policy.

Although it may be broken down into those elements for ease of discussion it is clear from the content of the condition that its object is to grant control of claims to the Insurer. That is achieved by the positive grant of permissions to the Insurer and the imposition of prohibitions on the Insured. The latter enable the former to be effective.

Condition 1 of the Policy provides that the due observance of any condition by the Insured shall be a condition precedent to any liability of the Insurer to make any payment under the Policy. Zurich’s case is that Land of Leather failed to observe Condition 3 in that they took steps to settle any claim they had against Linkwise for an indemnity in respect of third party claims for damages for personal injuries without specific instructions in writing from Zurich. The question which arises for decision is whether the first prohibition on the Insured applies only to claims against the Insured or also applies to claims by the Insured.

By the Policy Land of Leather was insured in respect of products liability. Thus the claims by customers against Land of Leather are claims in respect of which Land of Leather is insured. Being the Insurer Zurich has an interest in claiming an indemnity from any person whose conduct caused Land of Leather to be liable in respect of such claims. This is reflected in Condition 3 of the Policy which provides that the Insurer shall have control of all proceedings in respect of any claims for which the Insurer may be liable under the Policy. Those words (“all proceedings in respect of any claims for which the Insurer may be liable”) are capable of including not only claims against the Insured but also recourse actions by the Insured against those responsible for causing the Insured to be liable in respect of a claim. That they were intended to do so is clear from the second permission which expressly provides that the Insurer may use the name of the Insured not only to defend any claim but also to make any claim for indemnity or damages against any third party. The control of claims conferred on the Insured by Condition 3 therefore extends not only to claims against Land of Leather but also to claims by Land of Leather against others. That being so one would expect that the prohibitions on the Insured, which are part and parcel of the mechanism by which the Insurer has control of “all proceedings”, would also extend both to claims against the Insured and to claims by the Insured. It would be absurd if the Insurer had control of proceedings commenced in the name of the Insured against others but yet the Insured was under no prohibition not to settle such claims. Thus there appears to be considerable force in Zurich’s contention that “claim” in the first part of Condition 3 includes not only claims against the Insured but also claims by the Insured.

However, the Claimants contend that the prohibition on settling claims applies only to claims against the Insured, Land of Leather. Mr. Hofmeyr supported this construction with eight points.

The first point is that the Policy is a liability policy so that it responds to claims against Land of Leather. I agree that it is and that it does but I do not consider that this is a pointer in favour of construing the first prohibition as extending only to claims against Land of Leather. It ignores the circumstance that as an insurer of Land of Leather’s liabilities Zurich will have an interest in any recourse actions which may be available to Land of Leather.

The second point is that condition 2, which concerns notice of claims, is restricted to notice of claims against Land of Leather and therefore, reading the conditions as a whole, condition 3, which concerns control of claims, should be similarly restricted. I agree that that would be so unless there was a clear indication that claims in condition 3 had a wider meaning than in condition 2. There is such an indication, namely, the second permission which expressly applies to claims against third parties.

The third point is that the immediate context of the first prohibition is unequivocally referable to claims against Land of Leather because of the prohibition on admitting liability. I agree that the prohibition on admitting liability is indicative of the prohibition applying to claims against Land of Leather. But the question is whether the prohibition on compromising or settling claims extends to claims by Land of Leather. The prohibition on compromising or settling claims is capable of applying both to claims against Land of Leather and claims by Land of Leather. Having regard to the circumstance that the second permission expressly extends to claims by Land of Leather and that the prohibitions are supportive of the permissions I do not consider that the prohibition on admitting liability requires the first prohibition to be read as if it applies exclusively to claims against Land of Leather. I consider that the prohibition is intended to apply to both claims against and by Land of Leather. The prohibition on compromising or settling applies to both. The prohibition on admitting liability applies to claims against Land of Leather.

The fourth point is that the phrase “except at its own cost” refers to claims against Land of Leather only. I agree that it refers to such claims. If Land of Leather settles a claim against it by assuming an obligation to pay a sum of money and does so, it settles the claim against it at its own cost and does not act in breach of the prohibition. The question is whether such words can also refer to claims by Land of Leather. I consider that they can. If Land of Leather settles a claim it has brought against a third party for an indemnity in respect of a liability it has incurred and recovers a 40% indemnity and bears the remaining 60% itself then it settles the claim against the third party at its own cost and does not act in breach of the prohibition. The words “except at its own cost” are therefore not indicative that the condition applies only to claims against Land of Leather.

The fifth point is that the second prohibition expressly applies to claims against Land of Leather (“shall not ……give any information or assistance to any person claiming against him”) which indicates, it is said, that the prohibition as a whole applies only to such claims. There seems to me to be some force in this point. However, the point is only an indication. The condition as a whole must be considered. The second permission expressly refers to claims against a third party which, for the reasons I have expressed above, suggests that the first prohibition also applies to such claims. Thus the correct construction of the condition is, it seems to me, that where it was intended to refer to claims against Land of Leather only the condition said so expressly but where the condition refers to claims generally it was intended to refer both to claims against and claims by Land of Leather.

The sixth point is that the reference in the second permission to claims against third parties should not be regarded as an indication that the first prohibition also applies to such claims. The basis of this submission is that the second permission is a permission granted to the Insurer and therefore is not within the scope of condition 1 which provides that the due observance of conditions by the Insured shall be a condition precedent to any liability of the Insurer. The basis of the submission is correct but the desired conclusion, in my judgment, does not follow. The scope of the word claim in the first prohibition is indicated by consideration of condition 3 as a whole. The circumstance that condition 1 only applies to obligations of the Insured does not affect the construction of condition 3. In any event, as submitted by counsel for Zurich, an action by the Insured which prevented the Insurer from doing that which he was permitted to do by condition 3 would probably be a breach of an implied term of the Policy by the Insured and therefore would engage condition 1.

The seventh point was that other parts of the Policy use the word claim or claimant in the sense of claim or claimant against the Insured. Reference was made, by way of example, to Section 1 and Extensions, clauses 1 and 6. I agree that they do use the word claim or claimant in the sense of claim or claimant against Land of Leather but the second permission expressly applies to claims by the Insured and that, for the reasons I have given, is a cogent indication that the first prohibition also applies to such claims.

The eighth and final point is that any ambiguity in condition 3 should be construed contra proferentem, that is against the interests of the Insurer, since compliance with condition 3 is a condition precedent to the liability of the Insurer. In this regard reliance was placed upon The Resolute [2009] 1 Lloyd’s Rep. 225. I accept that proposition but, for the reasons I have given above in paragraph 46, I do not consider condition 3 to be ambiguous. I consider that it applies both to claims against Land of Leather and to claims by Land of Leather.

This question, which relates to the correct formulation and breach of an implied term, only requires to be decided in the event that Zurich fails on one of the earlier issues. It has not so failed and therefore the question does not arise for decision.

However, in deference to the careful arguments addressed on the issue I shall state as shortly as I can the respective arguments and what my decision would have been.

It was submitted on behalf of Zurich that if the February Agreement did not extend to a release of claims by Land of Leather against Linkwise or, assuming that it did, that the release was unenforceable for lack of consideration then, by signing the February Agreement which purported to apply to all claims without Zurich’s consent, Land of Leather acted in breach of an implied term of the Policy to act reasonably and in good faith with due regard to Zurich’s interests and rights of subrogation under the Policy. Land of Leather was in breach of that implied term because it acted neither reasonably nor in good faith with due regard to Zurich’s interests.

It was accepted on behalf of the Claimants that there was an implied term but it was submitted that it was that Land of Leather would not deal with any claim that it possessed against a third party in such a manner as to prejudice Zurich’s rights of subrogation in relation to that claim. It was further submitted that if such rights were prejudiced there would be no breach of that implied term if the Insured acted reasonably and in good faith with regard to the interests of the Insurer. It was accepted that if the February Agreement extended to rights by Land of Leather against Linkwise for an indemnity in respect of personal injury claims and was enforceable then Land of Leather had acted in breach of that term. However, if it did not extend to such rights or was unenforceable then there had been no breach because such rights had not been prejudiced. Even if the implied term was formulated as suggested by Zurich it could not be said that it had been breached in circumstances where a reasonable person with knowledge of the background available to both parties would not have understood the February Agreement to extend to such rights.

I was asked to determine the question as to the formulation of the implied term and the question of breach. Any damages flowing from breach were to be determined at a further hearing.

In essence Mr. Edelman QC submitted that the most persuasive authorities on the formulation of the implied term were two Canadian cases, Globe & Rutgers Fire Ins. Co.v Truedell [1927] 2 DLR 659 and Willumsen v Royal Insurance Co. Ltd. [1975] 63 DLR 112. In Globe the Ontario Supreme Court held that where the insurer was not subrogated to the insured because he had had not paid an amount equal to the insured’s loss the insured remained master of the action he had commenced to recover damages from a third party and in settling that action he must act with diligence and in good faith having regard to the fact that the insurers are interested. In Willumsen the Alberta Supreme Court followed the statement of principle in Globe. Prowse JA said that the obligation to settle in good faith meant “honestly and with no ulterior motive.” In both Globe and Willumsen it was held that the insured had acted in good faith.

In Globe reference was made to the English cases of Commercial Union Assurance v Lister (1874) LR9 Ch.App. 483 and West of England Fire Insurance Company v Isaacs [1897] 1 QB 226. In the former English case James LJ in the Court of Appeal referred to the insured having an equitable duty or obligation but did not further define it. In Willumsen Prowse JA equated that equitable duty with the duty set out in Globe. In the latter English case a proposition had been advanced to the effect that an insured had no right to deal with a claim against a third party to the prejudice of the insurer and such proposition was not disputed. Thus the court in that case said nothing further about the proposition and did not address the extent of the duty or its precise scope.

Boag v Standard Marine Insurance [1937] 2 KB 113 was decided before Willumsen but was not referred to in it. The case concerned a dispute between two insurers. The first had insured a cargo of wheat up to its full value. The value of the wheat increased during the voyage and an increased value policy was taken out with other insurers. The cargo became a total loss and both insurers paid out on their respective policies. The owners received a sum by way of general average. The first insurers claimed the sum paid out in general average. The increased value insurers claimed a proportionate share of the general average. It was held that the first insurers were entitled to the sum paid out in general average pursuant to section 79(1) of the Marine Insurance Act 1906. Lord Wright MR referred to the argument of counsel for the increased value insurers to the effect that there had been assigned to them, by means of letters of subrogation, a proportionate share in the general average. Lord Wright said that if that had been done the subrogation rights of the first insurers would have been prejudiced. Similarly, Scott LJ said that had the assured in any way prejudiced the rights of recovery of the first insurers so as to deprive them of the benefits of subrogation, the assured would have incurred a personal liability to the first insurers to the extent of the prejudice so caused.

Mr. Edelman QC submitted that when the judges in the English cases of West of England Fire Insurance Company v Isaacs and Boag v Standard Marine Insurance referred to the assured being obliged not to act to the prejudice of the insurer that expressed the net result of (a) the assured having acted in breach of duty and (b) such breach of duty having caused prejudice to the insurer. What the English cases did not do, he submitted, was to formulate the content of the duty. Mr. Edelman did not dispute that where there has been a breach of duty the assured is liable in damages to the extent of the prejudice caused.

Mr. Hofmeyr QC submitted that all of the cases relied upon by Zurich concerned settlement of the assured’s claim against a third party and that none concerned something less than actual settlement of the claim. He submitted that only settlement of the assured’s claim will amount to a breach of the implied term. Entering into a poorly drafted agreement which preserves the insurers’ rights of subrogation will not amount to breach. In support of this submission he relied upon the mention in the English cases of the assured not being permitted to prejudice the rights of the insurer which he said meant not abandoning or giving up the rights of the insurer. However, he accepted that where there was such prejudice the assured will not be in breach of the implied term if he has acted reasonably and in good faith.

I was referred to seven textbooks on the subject but none specifically addresses the dispute which I have to resolve. I was referred to The Law of Insurance Contracts by Clarke paragraph 31-6A-C, MacGillivray on Insurance Law 11^th.ed. paragraphs 22-042 and 22-049 – 22-055, Subrogation by Mitchell and Watterson paragraphs 10.157-10.165, Colvinaux & Merkin’s Insurance Contract Law paragraph C-0606, The Law of Marine Insurance by Bennett 2^nd.ed. paragraph 25.18, Insurance Practitioners Library Professional Indemnity Insurance Law by Enright and Jess 2^nd.ed. paragraph 16-041 and Arnould’s Law of Marine Insurance and Average 17^th.ed. at paragraphs 31-33 – 31-36.

Had it been necessary for me to decide between the competing formulations of the implied term I would have preferred Mr. Edelman’s formulation. The implied term arises because the insurer has a right to be subrogated to the rights of the insured when he indemnifies him pursuant to the policy of insurance. If the insured acts without regard to that contingent right he may harm the value of that right to the insurer. The most obvious harm occurs where the insured settles a claim he may have against a third party for an indemnity and so deprives the insurer of its benefit in whole or in part. But in principle harm may be caused to the insurer’s rights of subrogation where the claim against the third party is not lost or reduced in value by settlement. For example, the documents necessary to establish such claim may be destroyed. I therefore consider that the implied duty must be one which obliges the insured to act in good faith and reasonably with regard to the interests of the insurer. Mr. Hofmeyr accepts that if the insured does so act he will not incur any liability to the insurer even if he has settled a claim and so deprived the insurer of the benefit of that claim. I do not understand why the insured should only be liable, subject to that defence, for one type of damage to the insurer’s contingent rights of subrogation and not for other types of damage to such rights.

On the findings I have made as to the construction and enforceability of the February Agreement it does not matter which formulation of the implied term is correct. I have found that that it resulted in the settlement of Land of Leather’s claim for an indemnity against Linkwise in respect of Land of Leather’s exposure to personal injury claims. On that basis Mr. Hofmeyr does not suggest that Land of Leather could escape liability for breach of the implied term.

If however my finding as to the construction of the February Agreement is wrong and it did not result in settlement of the aforesaid claim for an indemnity then I accept Mr. Hofmeyr’s submission that there was no breach of the implied term even on Mr. Edelman’s formulation of the implied term. If a reasonable person, with the background knowledge available to both parties, would not have understood the February Agreement to have settled the claim for an indemnity against Linkwise in respect of personal injury liabilities of Land of Leather then it cannot fairly be said that Land of Leather, in making that Agreement, have acted unreasonably or in bad faith without regard to the interests of Zurich.

If the February Agreement on its true construction purported to settle that claim for an indemnity but is unenforceable for lack of consideration then, it seems to me, there was a breach of the implied term as formulated by Mr. Edelman but that it cannot have caused any loss. However, questions of loss are not to be decided on this hearing.

I will ask the parties to agree a form of order giving effect to my conclusions.