Peverel Freehold Ltd v Stonyfield Management Ltd

An indemnity covenant covering liabilities arising directly or indirectly in respect of a planning obligation is construed in its commercial and factual context. It may cover liability assumed under an indemnity given as part of the transaction by which an owner disposes of land and ceases to face direct liability. It does not ordinarily extend to liability voluntarily assumed after disposal, when the former owner has no remaining interest or exposure under the planning obligation, particularly after the liability has accrued and proceedings have begun. Such a later covenant relates to the later indemnity itself, rather than arising indirectly in respect of the original planning agreement. Where competing constructions are possible, the court may prefer the construction consistent with business common sense.

Stratford-upon-Avon District Council established liability against landowners under a planning obligation made under section 106 of the Town and Country Planning Act 1990. Stonyfield Management Ltd had transferred land to Peverel Freeholds Ltd (PF1), giving an indemnity covenant. PF1 later transferred the land to Peverel Freeholds No. 2 Ltd (PF2) without giving a matching indemnity in the transfer.

After the liability accrued and proceedings had been brought against PF2, PF1 gave PF2 a voluntary indemnity deed. PF1 sought to recover under Stonyfield’s earlier covenant. HHJ Purle QC dismissed the claim, and PF1 appealed. The central issue was whether PF1’s liability under the later deed arose indirectly in respect of the original section 106 agreement.

1. Appeal dismissed. The Court of Appeal unanimously agreed with HHJ Purle QC that PF1 could not recover under Stonyfield’s indemnity covenant.
2. The relevant question was one of contractual construction. Applying the unitary approach in Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900, the court considered the words used, the background reasonably available to the parties, and business common sense where competing constructions were possible.
3. The words covering claims arising directly or indirectly in respect of the section 106 agreement included a direct claim against PF1 while it owned the land. They also included an indirect claim under an indemnity given as part of the transaction by which PF1 disposed of the land, ceased to be directly liable, and passed the risk to its successor.
4. They did not include liability under an indemnity deed entered into after PF1 had disposed of the land without giving such an indemnity as part of that transaction. The later deed was voluntary, made after the section 106 liability had accrued and while it was being litigated. PF1’s liability therefore arose in respect of the later deed itself, rather than indirectly in respect of the original planning agreement.
5. This construction gave sensible content to the phrase used in the earlier covenant. The wider construction could expose Stonyfield to additional liability through PF1’s later acts, including by affecting possible contribution claims, and was inconsistent with commercial common sense. The timing and circumstances of PF1’s later covenant were consequently critical.

Order: appeal dismissed.

• Court of Appeal (Civil Division): dismissed Peverel Freehold Ltd’s appeal.
• Birmingham District Registry, Chancery Division: HHJ Purle QC dismissed PF1’s indemnity claim by an order dated 23 December 2012.