Euler Hermes UK Plc v Apple Computer BV

An insurer’s settlement offer must be construed from the documents read together and in their commercial context. A covering letter can impose contractual requirements even where an attached letter of undertaking is more formal and appears self-contained. Where an insurer knows that a debtor is withholding payment because of a dispute, an undertaking to recover the debt may include legal proceedings. If the settlement requires the insured to establish an entitlement to the debt, it imposes an obligation to achieve that result, not merely to take steps which the insured considers commercially reasonable. The insured may compromise or abandon the debt for its own reasons, but cannot do so at the insurer’s expense. The insurer may recover the settlement payment where proceedings in the insured’s name would yield no practical mitigation benefit.

Euler Hermes, a credit-risk insurer, paid Apple under a policy covering losses caused by trade debtors’ protracted default. Apple’s Saudi Arabian distributor withheld payment while claiming compensation following termination of its distributorship. Euler settled Apple’s claim, subject to requirements stated in covering letters and an accompanying letter of undertaking. Apple later decided not to pursue the distributor.

Euler sued to recover the settlement payment. The High Court held that only the letter of undertaking formed part of the settlement agreement and that Apple’s obligation required only reasonable collection steps. The appeal concerned the contractual effect of the covering letters, the scope of Apple’s obligation, and the loss caused by its failure to pursue the debt.

Moore-Bick LJ delivered the judgment, with which Brooke LJ and Sir Peter Gibson agreed. The appeal was allowed and Euler was awarded US$410,954.66.

1. The covering letters and the letter of undertaking had to be read together in their commercial context. The covering letters contained an offer to settle and stated three requirements. The expressions requiring Apple to satisfy those requirements indicated an intention to impose contractual obligations. Apple accepted those terms by providing the requested undertaking and accepting payment.
2. The policy’s reference to a dispute in clause 13(b)(2) was not confined to disagreement about the existence or amount of the debt. A debtor’s genuine claim to withhold payment was sufficient to interrupt the three-month payment period. The court considered that issue ancillary to the principal questions.
3. In context, the undertaking to take action to recover the debt was not limited to steps short of litigation. Legal proceedings were within its scope where necessary, particularly because Euler had been told that proceedings were imminent and the documents contemplated the debtor’s insolvency.
4. The first requirement in the covering letter obliged Apple to establish that the dispute had been resolved in its favour and that the distributor was indebted to it. The obligation was directed to achieving that result, rather than merely taking action. Apple’s decision to abandon the debt therefore constituted a breach, even though it may have been commercially sensible.
5. The evidence established that a judgment debt would probably have been recovered, albeit after delay. Euler’s loss was consequently the full amount paid under the settlement. Euler had not failed to mitigate its loss: proceedings brought in Apple’s name would have produced no greater recovery than damages against Apple and would have involved Euler in expense without practical benefit.
6. The court left undecided whether the policy’s salvage provisions independently entitled Euler to require Apple to litigate at its own expense. It also left undecided whether the policy obligation to take all practicable measures imposed a subjective or objective standard, although it expressed doubt that Apple could limit its duty to steps serving only its wider commercial interests.

1. Court of Appeal (Civil Division): allowed the appeal and gave judgment for Euler Hermes UK Plc in the sum of US$410,954.66: [2006] EWCA Civ 375.
2. High Court, Queen’s Bench Division (Commercial Court): His Honour Judge Mackie Q.C. dismissed Euler’s claim, holding that only the letter of undertaking was contractual and that Apple was not required to commence legal proceedings.