England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BIRMINGHAM DISTRICT REGISTRY
(HIS HONOUR JUDGE PURLE QC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		8th November 2012

Lord Justice Lloyd:

1. This is an appeal from an order of HHJ Purle QC made on 23 December 2012, sitting as a judge of the Chancery Division in the Birmingham District Registry. The relevant part of the order with which the appeal is concerned is paragraph 3, by which, in effect, the claim by a fourth party, Peverel Freehold Limited, for an indemnity against the fifth party, Stonyfield Management Limited, against liability to the claimant established by paragraphs 1 and 2 of the order, was dismissed. The judge refused permission to appeal, but Davis LJ granted permission. The principal liability, which is not now in issue, arose under a deed of planning obligation entered into under section 106 of the Town and Country Planning Act 1990 ("the section 106 agreement"). The issue is whether one of the companies liable to the claimant, Stratford-upon-Avon District Council, on the obligations under this agreement as owner of the land in question at the relevant time, was entitled to be indemnified against that liability by previous owners by virtue of indemnity covenants. The judge held that it was not so entitled, because there had been a break in the sequence of covenants. As was the case below, the appellant is represented by Ms Sheikh, and the respondent by Mr Rumney. Both of them have put in skeleton arguments, and have addressed to us clear and well-focused submissions to the court this morning. If I may so, in particular Ms Sheikh responded well to perhaps somewhat critical questioning from the bench. Mr Rumney had a less hard time.
2. The story begins with the section 106 agreement dated 12 October 2001 made between Stratford-upon-Avon District Council, Warwickshire County Council, Gallagher Estates Limited and Pettifer Limited, the latter two being defined as owners. I need not go into the details of the agreement. It provided in clause 6.1 for a covenant by the owners in favour of the district council and the county council to comply with planning obligations set out in the various schedules to the agreement. Schedule 9, paragraph 1, obliged the owners to pay a given amount to the district council in certain events, which eventually occurred in February 2009, as the judge held. Under clause 2.5, owners included successors in title. Section 106(3) makes obligations under a section 106 agreement binding on successors in title in any event. Under clause 8.1 of the agreement, no person was to be liable for the breach of any relevant covenant after it had parted with all interest in the relevant land. That is a provision permitted by section 106(4).
3. The land relevant in this case did change hands, or some of it changed hands, several times before February 2009. On 19 December 2003, part of the site was vested in Stonyfield Management Limited ("SML"), on a transfer from Pettifer Group Limited, the company which had previously been called Pettifer Limited. According to its terms, this transfer was not for money or any monetary value and SML was to hold the property on trust for David Wilson Homes Limited, at whose direction the transfer was made. Pettifer Group Limited covenanted with David Wilson Homes and with SML to comply with schedule 9 of the section 106 agreement.
4. On 29 June 2007 SML transferred relevant land to Peverel Freeholds Limited ("PF1") in consideration of the payment of £39,000. SML covenanted with PF1 (a) to indemnify PF1 against any claims for breaches of the section 106 agreement prior to the transfer (that is in clause 4.2) and also in clause 4.4 to indemnify PF1:

"... against all actions claims demands and liabilities (including costs and expenses) arising directly or indirectly in respect of:-

...

4.4.2 Any outstanding planning conditions obligations building regulation matters, or any agreements made pursuant to the Town and Country Planning Act 1990."

This is the covenant sought to be relied on.

5. Ms Sheikh showed us that clause 1.5 of that transfer defines the parties as including their successors in title. That has a clear relevance to other provisions of the transfer, including clause 3. She suggested that it could have been a basis for a direct claim by a successor in title to PF1, which I am about to mention, PF2, against SML. But on the one hand, no such direct claim was made in the proceedings, and on the other hand the point is not one which has been raised before this morning. It is not in the grounds of appeal, so it cannot now be relied on. Otherwise, as it seems to me, it does not add a great deal of relevance to the consideration of the transfer, which arises of course in the context where land did change hands by that transfer, and might well have changed hands thereafter, as it actually did, and in which section 106, as I have mentioned, makes obligations under relevant agreements by the owner of the land for the time being.
6. In turn, on 2 October 2007, PF1 transferred this and other land to Peverel Freeholds No. 2 Limited ("PF2") for a large consideration. PF1 did not covenant by way of indemnity or otherwise in favour of PF2 by this transfer. The absence of such a covenant from this transfer is what led the judge to decide against the indemnity claim. Thus, in February 2009, when the payment obligation arose, the relevant land, or some of it, was vested in PF2, which was therefore bound by the obligation in the section 106 agreement both as owner, as defined under the agreement, and in any event because of the effect of section 106(3). At that stage, however, it did not have the benefit of any covenant by any predecessor in title in its favour to indemnify it against this obligation. PF1, on the other hand, had the benefit of such a covenant, but was not liable under the section 106 agreement, because of clause 8.1, having parted with all its interest in the relevant land. It therefore faced no liability against which it needed to, or could, seek an indemnity by SML.
7. Stratford-upon-Avon District Council brought these proceedings in March 2010 against David Wilson Homes Limited, which still had an interest in some relevant land, and against PF2 as the owner of other relevant land. Initially PF2 sought to claim an indemnity against David Wilson Homes, but there was no basis for that, and that claim was struck out in November 2010. At the same time, PF2 was allowed by the court to claim over against PF1 and in turn PF1 against SML. The basis of that claim was, on the one hand, SML's indemnity covenant in favour of PF1, and on the other hand what had been put in place as the last piece of the jigsaw in the meantime. This was an indemnity deed dated 1 September 2010 between PF1 and PF2. This deed recited the transfer dated 2 October 2007 and proceeded to recite that PF1 had agreed to indemnify PF2, and it set out a covenant for an indemnity: (a) against claims arising from any breach by PF1, before the date of the deed, of the terms and covenants appearing in the section 106 agreement or the planning permission related to the property, and (b) by clause 1.2 "... against all actions claims demands and liabilities (including costs and expenses) arising directly or indirectly in respect of any outstanding planning conditions obligations building regulations or any agreements made pursuant to the Town and County Planning Act 1990" including but not limited to any arising under the agreement dated 12 October 2001. No consideration was given for this indemnity covenant, but because it was made by a deed none was necessary for it to be valid.
8. PF2's claim is, therefore, as follows. (1) It has been held liable to Stratford District Council in respect of an obligation under the section 106 agreement, including for costs. (2) PF1 has covenanted to indemnify it against that liability by the deed dated 1 September 2010. PF1 is therefore bound to indemnify it. It is not relevant that the deed was entered into at a time when both parties knew that the liability had arisen and that costs were being incurred by reason of the proceedings, but the extent of the liability is now established, and that is that. PF2's claim is only against PF1. That is its importance vis-à-vis SML. PF1's claim is that it has in these circumstances incurred a liability arising, albeit indirectly, in respect of an agreement under the 1990 Act, which is therefore within the terms of the covenant in clause 4.4.2 of the transfer dated 29 June 2007. The liability arises indirectly rather than directly because PF1 is not itself liable directly under the section 106 agreement, having parted with all its interest in the land. It arises indirectly because of its indemnity covenant in favour of its successor in title as purchaser, just as SML's indemnity covenant was given to it, PF1, as successor in title and purchaser from SML. Granted, the indemnity covenant was entered into after, rather than at the same time as, the transfer to PF2, but it is to exactly the same effect as the equivalent covenant by SML, so the detail of timing should make no difference to the liability of SML to PF1. The judge held that if PF1 had given such a covenant to PF2 in the transfer of 2 October 2007 as part of the consideration for the transfer, there would be no difficulty in construing the liability of PF1 in favour of PF2, when it later arose, as an indirect liability in respect of the section 106 agreement within the scope of SML's covenant.
9. However, taking the 2010 indemnity covenant as given voluntarily by PF1, under no obligation and for no consideration, the judge held that it was not an outstanding obligation within the terms of the indemnity covenant given by SML, and he therefore dismissed the claim. He said he was influenced by the possibility that, if an obligation entered into such circumstances by PF1 was covered by the SML indemnity covenant, then the liability under that covenant might be substantially enlarged, for example by being given and having effect in relation to more of the relevant land, the ownership of the relevant land having been divided up in the meantime. Whether in practice that could make a real difference to the liability of SML under its indemnity covenant in this case is not entirely clear. More than one company was liable to Stratford-upon-Avon District Council in respect of a payment, hence the fact that Stratford sued both David Wilson Homes Limited and PF2. We were told by Mr Rumney that what has happened is that each of those companies has paid one half of the liability to Stratford. I suppose that in theory PF1 could have agreed to indemnify David Wilson Homes as well by a separate deed in respect of the same matters, but since all owners are liable for the same amount, it would only alter the bottom line for SML if it affected the possibility of a contribution claim by one owner jointly liable against another. That might be possible in certain circumstances. In the present case, since David Wilson Homes is part of the same group as SML, it is perhaps only theoretical.
10. For PF1, a number of points are taken on the facts. Reference was made to some answers given to pre-contract enquiries before the sale by SML to PF1, which was said to amount to a representation by SML that there was no outstanding obligation under the section 106 agreement. For my part, I do not so read the answers given. In any event, those answers did not lead PF1 to refrain from taking the indemnity covenant from SML, which was clearly a prudent thing to do in case there were some outstanding obligation, and of course given that in fact there was such an outstanding obligation under Schedule 9. It seems likely that the point made at paragraph 13 of the grounds of appeal is correct, namely that the omission of an indemnity covenant by PF1 in favour of PF2 in the transfer of October 2007 was an oversight and that the later deed was entered into to put it right once the omission had come to light. I cannot, for myself, accept the point made at paragraph 17.5 of the grounds of appeal that it is inconceivable that PF2 intended to take on the liability under section 106 without an indemnity from its vendor any more so that PF1 had done so. As it seems to me, there is no basis for any prior assumption as to the incidence of such obligations between parties dealing with land, whether at arm's length or not. This is not, in any event, said to have been a mistake such as could have led to rectification of the October 2007 transfer.
11. It comes back to a question of construing the SML covenant in the light of what happened thereafter in order to ascertain whether the liability to which PF1 is subject is one against which SML covenanted to indemnify it. The submission for SML is that the indemnity covenant should be understood as being against liability incurred by PF1 as owner of the land transferred to it by SML, incurred either directly because the obligation in question accrued at a time when PF1 was liable itself as owner of the land or indirectly because it arises, for example, under an indemnity covenant given by PF1 as owner of the land to its immediate successor in title on a disposal of the land, by which PF1 ceased to be directly liable and by which it undertook to indemnify its purchaser or its successor in title whether on purchase or otherwise, as a condition of the disposal.
12. For SML, Mr Rumney submits that once PF1 had sold the land to PF2 without being required to give an indemnity covenant itself in favour of PF2 to match that given by SML, PF1 was not in any way at risk or exposed to any liability such as is provided for in the SML indemnity covenant. So, if it imposed such a liability on itself later, then, even though the liability is of a kind within the terms of the SML indemnity covenant (of course if it were not then the question would not arise) it did not in terms of the contract arise even indirectly from PF1's position as owner of the land. The transaction between PF1 and PF2, though for value, was not of course negotiated in any real sense, but was set out by the corporate group of which both were members. It appears that it was organised because of the requirements of refinancing within the group. Those responsible for the drafting could perfectly well have inserted an indemnity covenant. The reference to the answer to the earlier pre-contract enquiries seems to me to be a red herring. It cannot explain the omission, since it did not lead to such an omission on the initial transfer from SML to PF1. It is only because PF1 and PF2 were associated companies that they could have considered entering into the later deed of indemnity as they did. If the transfer from PF1 to its purchaser had been at arm's length to an unrelated body, it does not seem to me conceivable that such a deed would have been entered into unless either the requirements of rectification could be satisfied, which is not this case, or PF2 gave value to PF1 for the covenant: that is to say, it bought the benefit of the covenant by a separate transaction after and distinct from the original purchase. That is all the more clear, since the obligation under section 106 had by then accrued. It was not still contingent. It was actually being sued on by Stratford District Council.
13. It is perhaps a useful test to consider what the position would be if PF1 had sold to an independent third party at arm's length on terms which did not include an indemnity covenant, which would be reflected in the price payable, since the third party would thus face the prospect of potential liability under the section 106 agreement which would not be covered by an indemnity. Suppose later, for whatever reason, this third party had approached PF1 and had asked for an indemnity covenant, for which it clearly would have to give value. Would a liability of PF1 under a covenant sold and entered into in such circumstances be covered by SML's covenant? That is a variant of the question which the judge had to consider, but it seems to me it is a legitimate point of comparison. PF1 could insist on receiving value for the covenant but, if Ms Sheikh is right, could then claim over against SML to be indemnified against the liability which it had incurred for full value.
14. No authority was cited to us of any relevance to the point. It is a question of construction of the SML covenant in relation to the facts as they occurred, and in particular as to the words "arising indirectly". For the appellant, Ms Sheikh submits that, given that the liability against which the indemnity is claimed is "in respect of an agreement made under the Town and Country Planning Act", and it is a liability of PF1, it must arise either directly or indirectly in respect of that agreement. There is no third possibility, she says. The subject matter of the claim was no different from that which SML undertook to be answerable for by its indemnity covenant. It is fortuitous, so far as SML is concerned, she contended, that PF1 did not give PF2 an indemnity covenant on the sale matching that given a few months earlier by SML to PF1. So being let off the hook might be an unforeseeable and unexpected bonus for SML.
15. For the respondent, the argument which appealed to the judge is that SML's covenant cannot fairly be read as extending to a liability on PF1, which it imposed on itself: (a) gratuitously; (b) at a time after it had itself ceased to have any liability under the section 106 agreement, and therefore to have any interest or concern as to the consequences of such liability incurred by anyone else; and (c) after the liability on the then owner (as it happens, PF2), had in fact accrued, and when it was already the subject of proceedings against PF2 on the part of Stratford District Council.
16. In considering how to resolve this dispute as to the true construction of the indemnity covenant, I have regard to the now familiar words of Lord Clarke of Stone-cum-Ebony in Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 at paragraph 21, as follows:

"The language used by the parties will often have more than one potential meaning. I would accept the submission made on behalf of the appellants that the exercise of construction is essentially one unitary exercise in which the court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other."

17. Ms Sheikh would say that nothing in her reading is inconsistent with business common sense. It does not expose SML to a liability of a kind other than that which it was, in any event, expecting. SML had no control over what would happen after PF1 became owner. PF1 might have remained owner until the section 106 liability accrued or it might pass the land on, and the land might be passed yet further on. In the case of any transmission of the title, SML might reasonably expect that PF1 and any later disponor would give an indemnity covenant which would leave SML exposed indirectly. That is all the more so, given that the section 106 liability might not accrue until 2009: that is to say, some six years from the date on which it originally became effective in 2003. So if SML turned out not to be liable, that would, as I have mentioned, be an unexpected bonus for it.
18. Conversely, Mr Rumney argued that the parties to the SML covenant cannot have been taken to have intended that, after PF1 had parted with all interest in the land, on terms which for whatever reason left it unexposed to either direct or indirect liability in respect of the section 106 agreement, PF1 could nevertheless re-impose on itself, and thereby on SML, liability in respect of the section 106 agreement. Of course, what PF1 imposed on itself for its own sake was neither here nor there in relation to SML. All that matters for present purposes is whether what PF1 did has an effect of bringing something back within the terms of the SML covenant, which otherwise (prior, in the present case, to the 2010 deed of indemnity) would have had no content.
19. The judge agreed with Mr Rumney and was influenced by the thought that otherwise PF1's later acceptance and self-imposition of liability could have enlarged SML's risk, for example by offering an indemnity to another owner and thereby depriving itself and indirectly SML of the benefit of a possible contribution claim. That is not exactly the point made by the judge at paragraph 63 of his judgment, and I would not attach too much significance to the point, but it seems to me that it is a legitimate consideration and it does show that there could be circumstances, if Ms Sheikh is right, under which PF1's later and gratuitous acts, gratuitous in the sense of unconnected with the transfer of the relevant land, might have exposed SML in certain respects to a more onerous liability, in the sense of a liability which could not be mitigated either by PF1 or, in effect by subrogation by SML, by a contribution claim against someone else also liable to the council.
20. It seems to me that Mr Rumney is right and that the critical words, "claims arising directly or indirectly in respect of" in the section 106 agreement, ought to be construed as including a claim on PF1 arising as owner of the land (that is to say arising directly) or a claim arising on it under an indemnity covenant given as part of the transaction by which it parted with and ceased to be owner of the land and thereby ceased to be at risk of direct liability (that would be arising indirectly). It cannot, in my judgment, be regarded as consistent with commercial common sense that it should also extend to liability under an indemnity covenant given after PF1 has parted with all interest in the land and has done so without giving the indemnity covenant as part of the deal. Whether the later covenant is given gratuitously or for consideration probably does not matter, but I cannot accept that the words of the indemnity covenant given by SML should be read as including liability arising under a later indemnity covenant given by PF1 after it had parted with the land and therefore at a time when it was not at risk in any respect under the section 106 agreement. All the more this is so when the covenant was given after the liability had accrued and at a time when it was actually being sued upon by Stratford-upon-Avon District Council.
21. In my judgment, in these circumstances the claim by PF2 against PF1, although clearly relating in a sense to the section 106 agreement, arose in respect of the self-imposed 2010 deed of indemnity and that is not a claim arising directly or indirectly in respect of the section 106 agreement within the terms of the SML indemnity covenant. Contrary to Ms Sheikh's argument, it seems to me that the timing and circumstances of the indemnity covenant given by PF1 are critical. If it had been given in the transfer to PF2 as part of that transaction, it would have been bound up with PF1's position as owner of the land. It would have been part of the terms on which PF1 ceased to be owner and thereby ceased to be directly at risk under section 106, passing that risk of liability on to its successor in title, as was envisaged as possible by the agreement itself and of course by section 106. That is therefore properly described as opening PF1 to a claim arising indirectly in respect of the section 106 agreement. That reading gives sensible and adequate content to the use of the phrase in the SML "arising directly or indirectly in respect of" the section 106 agreement. The wider reading contended for by Ms Sheikh seems to me to flout business common sense and not to be a legitimate construction of the covenant for that reason.
22. I therefore agree with the judge, and would dismiss the appeal.

Lady Justice Rafferty:

23. I agree.

Lord Justice Ward:

24. I also agree.

Order: Appeal dismissed.