Horwood & Ors v Land of Leather Ltd & Ors

Contractual releases are construed objectively, by reference to the language used, the commercial purpose of the agreement and the relevant background known to both parties. General words of release may extend beyond claims previously identified in negotiations where the agreement uses wider language and is intended to bring the parties’ dispute to an end. A bad bargain does not justify departing from the ordinary meaning of the words.

A structured payment arrangement may constitute good consideration even where the total sum payable is unchanged. In a liability policy, a claims-control clause may extend to claims by the insured against third parties where the policy gives the insurer control over recourse proceedings. An implied duty may require the insured to act reasonably and in good faith with regard to the insurer’s contingent subrogation rights.

The claimants alleged personal injury arising from sofas supplied by Land of Leather Ltd, which was in administration. Land of Leather was insured for product liability by Zurich Insurance plc. The claimants sought to proceed against Zurich under the Third Parties (Rights against Insurers) Act 1930.

The court tried preliminary issues concerning a February 2008 agreement between Land of Leather and its supplier, Linkwise. The issues were whether the agreement released Land of Leather’s potential indemnity claim against Linkwise, whether the agreement lacked consideration, and whether entering into it breached condition 3 or an implied term of the insurance policy.

1. Construction. The February agreement was a binding and enforceable agreement. Its general undertaking that Land of Leather would make no further claim against Linkwise referred to claims arising from the alleged allergic reactions, save for the agreed payment of US$900,000. It therefore included Land of Leather’s claim for an indemnity in respect of personal injury liabilities. The court applied the objective principles of construction stated in Chartbrook v Persimmon Homes [2009] 1 AC 1101, ICS v West Bromwich Building Society [1998] 1 WLR 896 and BCCI v Ali [2002] 1 AC 251.
2. The relevant commercial purpose was to resolve the problems between Land of Leather and Linkwise and close the dispute. The earlier invoice’s narrower wording was not incorporated. The possibility that the agreement might prove commercially disadvantageous did not justify a narrower construction. The court followed the approach in Wickman Machine Tools v Schuler [1974] AC 235 and Chartbrook v Persimmon Homes [2009] 1 AC 1101.
3. Consideration. The February agreement was supported by consideration. It replaced an implied obligation to pay within a reasonable time with a structured obligation to provide six monthly credits of US$150,000. That payment structure was itself valuable consideration. Alternatively, it conferred a practical or commercial benefit by giving Land of Leather greater certainty of payment, consistently with Williams v Roffey Bros. [1991] 1 QB 1.
4. Condition 3. The first prohibition in the policy’s claims-control clause applied to claims both against and by Land of Leather. The insurer’s express power to make or defend indemnity or damages claims against third parties indicated that the insurer was intended to control recourse actions as well as claims brought against the insured. The clause was not ambiguous, so the contra proferentem principle discussed in The Resolute [2009] 1 Lloyd’s Rep. 225 did not apply.
5. Implied term. The issue was unnecessary to the result because Zurich succeeded on the preceding issues. The judge nevertheless indicated that the implied term would require the insured to act reasonably and in good faith with regard to the insurer’s contingent subrogation rights. The term could be breached by conduct damaging those rights even where the insured’s claim against the third party had not been settled.
6. The parties were directed to agree an order giving effect to the conclusions.