Clipper Logistics Group Ltd v Monsoon Accessorize Ltd

Contractual indemnities covering costs and expenses caused by breach may extend to reasonable expenditure incurred to avoid the later imposition of interest, fines or penalties. An actual assessment, demand, fine or penalty is not necessarily a condition precedent where the wording does not say so. The construction depends on the language read in its commercial context, including the parties’ commercial purpose and the avoidance or mitigation of foreseeable liabilities.

The parties had entered into a warehousing agreement under which Clipper was required to operate a bonded warehouse and indemnify Monsoon against specified liabilities arising from breach. Their subsequent Settlement Agreement contained further indemnities in clause 13.1.1 for interest, fines and penalties imposed by or payable to HMRC, together with costs and expenses resulting from breach.

Monsoon claimed sums including duty, professional fees and internal costs arising from alleged failures in the bonded-warehouse arrangements. The preliminary issue was whether clause 13.1.1 covered costs and expenses only where an HMRC fine, penalty, assessment or equivalent liability had already arisen, as Clipper contended, or whether it also covered reasonable costs incurred to avoid or mitigate such liabilities.

1. The preliminary issue was answered in the negative. Clipper’s proposed construction was rejected, and Monsoon’s construction was preferred.

2. The court applied the commercial approach to contractual interpretation reflected in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. The relevant question was what the Settlement Agreement would convey to a reasonable person with the background knowledge reasonably available to the parties.

3. The commercial purpose supported coverage of reasonable costs incurred to avoid an actual fine, penalty or assessment. It would be commercially unlikely for the parties to indemnify Monsoon after such a liability arose but not when Monsoon took reasonable steps to prevent it arising.

4. Clause 13.2 supported that construction. It provided for payment of costs and expense claims under clauses 13.1.1 and 13.1.2 even though no relevant assessment, fine or penalty had yet arisen. The words “together with” required a link between the costs and the breach, but did not require an actual HMRC liability.

5. Joel v Rogerson [1943] Ch 311 was of limited assistance because it concerned different wording in a will. The Schedule 3 provisions did not materially assist the construction. The costs and expenses therefore had to result from Clipper’s breach of clause 7.1.7, but need not be consequent upon an existing fine, penalty or assessment.