England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
LEEDS DISTRICT REGISTRY

		The Court House Oxford Row Leeds LS1 3BG
		3rd March 2011

Judge Behrens :

1 Introduction

1. The Claimant ("Clipper") is a company providing logistical and warehousing services. The Defendant ("Monsoon") is a company selling clothing and operates a large number of fashion and accessories shops throughout the world.
2. The dispute between the parties arises indirectly out of a warehousing agreement dated 12 December 2006 ("the Agreement") between the parties under which Clipper provided warehousing and distribution services to Monsoon from a distribution centre at Wellingborough ("the Distribution Centre"). It will be necessary to refer to the Agreement in more detail later in this judgment. For present purposes it is sufficient to note that under clause 7.1.7 Clipper agreed to operate the Distribution Centre as a bonded warehouse, to do nothing to prejudice its status as such and to indemnify Monsoon against all costs and expenses (including fines and penalties) which Monsoon incurred as a result of any breach.
3. Disputes arose between the parties concerning the Agreement and this led, after considerable and protracted negotiation, to the execution of a further agreement on 21 November 2008 ("the Settlement Agreement"), which was designed to bring an end to the business relationship between the parties. The Settlement Agreement resolved some of the disputes, left others unresolved with mechanisms for their resolution and provided for the handover of operation of the Distribution Centre with indemnities given by Clipper to Monsoon in relation to the Distribution Centre and its operation. It will be necessary to refer also to the Settlement Agreement in more detail later in this judgment. For present purposes it is sufficient to note that under the terms of the Settlement Agreement some moneys (£2,825,329) were released to Clipper immediately and some (£1,106,443) were to be paid into an escrow account to be released to Clipper on specified dates subject to claims for indemnity by Monsoon.
4. The £2,825,329 was duly released to Clipper and the £1,106,443 was duly paid into the escrow account. Walker Morris on behalf of Monsoon submitted a number of claims under the Settlement Agreement. Disputes then arose over the release of the monies in the escrow account.
5. On 13^th January 2010 Clipper commenced these proceedings against Monsoon. In summary Clipper sought £488,053.18 plus interest which it contended should have been released from the escrow account. In so doing it acknowledged that Monsoon was entitled to have retained in the escrow account a sum of £241,331.19 in respect of a Bond Duty Claim that had been made by Walker Morris until such claim was settled. On 16^th February 2011 Monsoon filed its Defence and Counterclaim. Amongst the claims raised was the Bond Duty Claim of £241,331.19.
6. On 2^nd March 2011 Clipper filed its Reply and Defence to Counterclaim. It disputed the Bond Duty Claim on a number of grounds. Central to the application currently before the Court is the plea in paragraph 11. It will be necessary to set out paragraph 11 in more detail later in this judgment. In summary the Bond Duty claim was brought by Monsoon on the ground that it was "costs and expenses" within the meaning of clause 13.1.1 of the Settlement Agreement. In paragraph 11 Clipper contends that, on its true construction, clause 13.1.1 cannot embrace such a claim because no interest, fine or penalties have been imposed on Monsoon by HMRC and Monsoon is not liable for such financial liabilities.
7. Meanwhile, on 10^th February 2010 Clipper issued an application for summary judgment. Clipper argued that the bulk of the sums sought to be set-off by Monsoon could not be set off as a matter of law/construction of the Settlement Agreement, with the result that all the Escrow Funds, save only those sums said to constitute "Indemnity Claims" should be paid out. Subsequently, on 5 May 2010 Clipper issued a further application for strike out and/or summary judgment in respect of part of Monsoon's Counterclaim. Both applications were listed together at a hearing to take place over 2 days.
8. Shortly before the hearing the parties reached a compromise. Monsoon abandoned all of its claims save for the Bond Duty Claim. Thus it consented to the further payment out to Clipper from the Escrow Account of the remainder of the Escrow Funds except for £241,331.19. That compromise was contained in a schedule which was attached to an order made by Judge Langan QC on 26 May 2010.
9. In relation to the Bond Duty Claim Judge Langan QC ordered the trial of a preliminary issue in the following terms:

"Whether the construction for which Clipper contends in paragraph 11 of the Reply of its Reply and Defence to Counterclaim is the true construction of the Settlement Agreement (as defined)".

10. It is that preliminary issue which falls for determination in the trial before me. Both Counsel agree that the answer depends on the true construction of clause 13.1.1 of the Settlement Agreement.
11. The only evidence before the Court are two witness statements from David Hodkin, Clipper's Finance Director and two witness statements from Gwendoline Davies, the partner in Walker Morris acting for Monsoon. There was no cross –examination of the witnesses it having been agreed between the parties that the failure to cross-examine would not create an issue estoppel in any later proceedings
12. I was also referred to a number of relevant documents including the pleadings, the Agreement, the Settlement Agreement, the correspondence setting out the nature of the claims and a completion statement made at or about the time of the Settlement Agreement showing a breakdown of the figures involved.

2 The Agreement

13. Mr Grant, on behalf of Clipper, contended that an understanding of the Agreement was essential background to the question of construction in issue before me. He therefore took me through a number of clauses of the Agreement.
14. In summary under the Agreement Clipper agreed to provide services (as specified in the Agreement) to Monsoon for a fixed term of 5½ years from 6^th December 2006. There were provisions for early determination but none were relevant. Clipper was entitled to be reimbursed the costs of providing the services and to charge a management fee (as defined) of 6% of the costs. In clause 3 Clipper was to be the sole and exclusive supplier of services defined in the Service Specification.
15. Clause 7 contained a number of warranties by Clipper. As already noted reliance is placed on clause 7.1.7:

Subject to the further provisions of this Clause 7.1.7, [Clipper will] operate the Distribution Centre as a Public Customs Warehouse Type A as defined by HM Customs and Excise (a "Bonded Warehouse") [Clipper] will do nothing to prejudice the Distribution Centre's status as a Bonded Warehouse. [Clipper] will arrange for and process any applicable duty on the Monsoon Stock using Monsoon's deferment account with HM Customs & Excise and [Clipper] will only release Monsoon stock stored in the Distribution Centre in accordance with Monsoon's directions and upon presentation of appropriate documentation. [Clipper] will indemnify Monsoon and keep Monsoon indemnified against all costs, claims, losses or expenses (including fines and penalties) which Monsoon incurs due to any breach of this Clause 7.1.7.

3 The Settlement Agreement

16. As already noted there were disputes between the parties both as to the level of service provided by Clipper and as to the costs of those services. In the result there were negotiations between February and November 2008 designed to resolve those disputes. During the period up to the Settlement Agreement Monsoon withheld payment that would otherwise have been due to Clipper.
17. I was referred to a number of clauses in the Settlement Agreement as being relevant to the construction of clause 13.1.1.
18. Clause 1 is headed "Background". Clause 1.3 made it clear that the Settlement Agreement was in full and final settlement of the Dispute in relation to matters arising from the Agreement.
19. Clause 2 is headed "Termination". Under clause 2.1 the parties agreed that the Agreement would be treated as terminated with effect from "the Final Handover Date" (as defined). It was further agreed (Clause 2.2) that after the Final Handover neither party should have any further liability to each other by virtue of the early termination of the Agreement. On the other hand (under clause 2.3) save as provided in the Settlement Agreement the terms of the Agreement remained in force until the Final Handover Date. The Final Handover Date in fact turned out to be 17^th April 2009.
20. Clause 3 is headed "Interim Financial Statement and Phase 2 Equipment Payment". Under clause 3.2 Monsoon agreed to pay a sum immediately to Clipper. It is not necessary to analyse how that sum is calculated. The calculation is set out in the completion statement dated 19/11/2008 to which I was referred. The amount paid in accordance with that calculation was £2,825,329.19. Under clause 3.4 Monsoon were obliged to pay a sum into an escrow account in the joint names of Cobbetts and Walker Morris. Again it is unnecessary to analyse the calculation of the amount which is again set out in the completion statement. As already noted the amount in fact paid into the escrow account pursuant to the calculation was £1,106,443.30. The moneys in the escrow account were to be dealt with in accordance Schedule 3.
21. Clause 4 (headed "HMRC Bond, TUPE, and Migration of WMS System") contained detailed provisions as to the giving of notice to HMRC for cancellation of the existing Bond and the execution of a New Bond, the transfer of the employees employed at the Distribution Centre. It is not necessary to refer to those terms in detail.
22. Clause 5 (headed "Payments to Clipper") contains a number of acknowledgments in respect of payments made. Under clause 5.6 it was agreed that no further payments would be due between the parties under the Agreement or otherwise save in accordance with the Settlement Agreement.
23. Clause 10 is headed "Mutual Settlement". Clause 10.1 provides:

Save to the extent set out in the Settlement Agreement and subject to the provisions of clauses 11 and 13, the terms set out herein are in full and final settlement of any and all causes of action, claims or liabilities (including claims for costs and/or interest) whether actual or contingent and whether known or unknown which either party has or may have up to and in respect of the period up to the date of the Settlement Agreement against the other Party arising out of or in connection with the Agreement, the Dispute and the termination of the Agreement.

24. Clause 11 is headed "Entire Agreement; Limitation of Clipper liability". Clause 11.1 is an entire agreement clause in wide terms. Clause 11.2 excludes Clipper's liability in respect of any claim save in respect of 4 categories of claim. One of these categories (clause 11.2.1) consists of indemnity claims under clause 13. Clause 11.3 limits Clipper's liabilities for Claims. Clauses 11.4 and 5 provide time limits for bringing claims and issuing proceedings in respect of such claims.
25. Clause 13 is central to the current dispute. It is headed "Indemnities". It provides:

"Subject to clauses 13.2, 13.3 and 13.10 and 11.3.3, Clipper will indemnify and keep Monsoon indemnified against:

13.1.1 any interest, fines and/or penalties (including without limitation any damages in lieu thereof and any interest on late payment) imposed by HMRC on or payable by Monsoon to HMRC (including without limitation, where Monsoon becomes liable to HMRC, as a result of Clipper having failed to pay any interest, fines and/or penalties imposed by HMRC on Clipper) which arise as a result of any failure by Clipper to perform its obligations under clause 7.1.7 of the Agreement whether before, on or after the dates of this Settlement Agreement, together with any costs and expenses (including but not limited to professional fees) properly incurred which result from such failure."

13.1.2 any duty and/or interest, fines and/or penalties (but for the avoidance of doubt not value added tax) assessed by HMRC on Monsoon in respect of Stock Loss … which arise as a result of the failure by Clipper to perform its obligations under clause 7.1.7 of the Agreement whether before, on or after the date of this Settlement Agreement. together with any costs and expenses (including but not limited to professional fees) properly incurred which result from such failure.…

13.1.3 subject to clause 13.4 and 13.5, any claims and losses costs expenses (properly incurred and including but without limitation professional fees) other than those set out in clause 13.1.1 or 13.1.2, which arise as a result of any failure by Clipper to perform its obligations under clause 7.1.7 of the Agreement whether before, on or after the dates of this Settlement Agreement where such failure results in HMRC:

………

26. Clause 13.2 is or may be relevant to the construction of clause 13.1.1 as it contains a reference to "costs and expenses":

Without any admission on the part of Clipper as to the existence of any such breach the Parties have agreed that the cost and expense claims in respect of the indemnities at clauses 13.1.1 and 13.1.2 up to the date of this Settlement Agreement is £50,964.98 (excluding VAT) (which sum will be deducted by Monsoon from the sums otherwise payable to Clipper on the signing of this Settlement Agreement.

27. Schedule 3 contains detailed provisions as to the operation of the escrow account. Although Mr Grant enthusiastically took me through the provisions in some detail in his skeleton argument and his oral submissions most of the provisions contain no assistance as to the construction of clause 13.1.1. I was however referred to three provisions in Schedule 3 which are said to have a bearing on the true construction of clause 13.1.1.
28. Paragraph 3.1 contains an acknowledgment that there are issues relating to Clipper's obligations under clause 7.1.7 of the Agreement. Monsoon had made a voluntary declaration to HMRC and that those issues were the subject of active discussions at the time between Clipper, Monsoon and HMRC and were actively being investigated by HMRC. Paragraph 3.2 makes it clear that Clipper was aware that the notified bond and duty issues could give rise to a claim under clause 13.1 of the Settlement Agreement
29. Paragraph 3.5 deals with situations where sums may be retained in the escrow account until claims made by Monsoon are settled. On a natural reading of the clause there are three such situations each separated by the word "or":

1.. if any assessments or demands have at the relevant time been raised by HMRC in respect of Notified Bond or Duty issues

2.. if there are any claims not paid under clause 13.1.1 or 13.1.2 in respect of costs and expenses which are the subject of the indemnities given by Clipper under clauses 13.1.1 and 13.1.2 (and which have not been satisfied in full)

3.. if there are any claims notified under clause 13.1.3 …

30. Paragraph 4 deals with the meaning of "Settled" for the purpose of Schedule 3. It gives 4 separate situations where a claim under clause 13.1.1 or 13.1.2 is taken to be Settled. The first and third of these occur if Monsoon has paid a relevant assessment or demand. The second occurs if HMRC has confirmed to Clipper that it does not intend to raise any assessment or demand in respect of Stock Loss. The fourth is where in a claim in respect of costs and expenses Clipper has paid the amount on full or such claim has been determined by a final decision of court. It is pointed out that the claim for "costs and expenses" appears to be an independent situation.

4 The Bond Duty Claim

31. The bond Duty Claim is pleaded in paragraphs 19 to 22 of the Defence. In summary it is alleged that Clipper was in breach of its obligations under clause 7.1.7 of the Agreement and acted in a way that prejudiced the Distribution Centre's status as a bonded warehouse. Four particular matters are relied on:

failure to arrange for and process applicable duty on Monsoon's stock

failure to process VAT adjustments accurately

adopted incorrect valuation methods on short delivery consignments

applied inaccurate tariff classification to goods

32. The loss claimed is said to amount to £241,331.19.
33. The pleading incorporates by reference two letters (dated 14^th and 23^rd April 2009) sent by Walker Morris to Cobbetts where the claim is set out in more detail
34. In the letter of 14^th April the Bond Duty claim is set out in tabular form thus:

Claims Summary	Net Cost
Professional Fees
Legal fees - Walker Morris	16,371.37
Other (Ian Dudley)	5,362.00
Total	21,733.37
Internal Fees Monsoon
Amanda Bond	5,087.75
Dawn Pike	6,640.00
Internal resource for debonding exercise	2,000.00
Total	13,727.75
Costs associated with De-bonding
Costs of duty - goods re-exported outside EEC	156,601.94
Further costs after 6th April	TBC
Lost interest for early duty payment	16,068.00
Lost interest for early VAT payment	25,181.00
Total	197,850.94

35. In the letter of 23^rd April 2009 the claim was increased by £4,223.21 in respect of the duty on goods re-exported outside EEC for the week commencing 6^th April 2009.
36. It will be seen that the bulk of the claim is in respect with duty paid in respect of goods subsequently re-exported out of the UK. No doubt there are issues as to whether such duty was paid as a consequence of a breach by Clipper of clause 7.1.7 of the Agreement. For present purposes it is to be assumed that they are. Equally it may be questionable whether the debonding exercise at such significant cost was a reasonable method of mitigating Monsoon's loss as a result of the (assumed) breach of clause 7.1.7. These and other issues are canvassed in the correspondence and do not need to be set out in detail.
37. It is, however, common ground between the parties that these sums were not "interest, fines and/or penalties imposed by HMRC on or payable by Monsoon to HMRC" within the first part of clause 13.1.1 of the Settlement Agreement.

5 The £50,964.98 in clause 13.2

38. There is a breakdown of the figure of £50,964.98 in the Completion Statement. It represents 75% of the costs of two persons (Jeanette Harwood of Walker Morris and Ian Dudley of Customs Network Ltd). Those costs are dealt with in paragraphs 22 to 26 of the witness statement of Ms Davies.
39. Both persons were engaged by Monsoon to investigate and advise on the potential problems and liabilities created by Clipper's alleged failure to perform under the Agreement and clause 7.1.7. The invoices for the work are exhibited. Ms Davies makes the point that the costs related to general advice on the management of the bond and other requirements of HMRC. In particular they did not arise out of "interest, fines and/or penalties imposed by HMRC on or payable by Monsoon to HMRC"

6 Paragraph 11 and the Preliminary Issue.

40. In paragraph 11 of the Reply and Defence to Counterclaim Clipper has sought to undermine the whole of the Bond Duty Claim:

"…on a true construction of clause 13.1.1 of the Settlement Agreement Clipper is not liable to indemnify Monsoon for any "costs and expenses" except in circumstances where either (1) HMRC has imposed "interest, fines and/or penalties (including without limitation any damages in lieu thereof and any interest on late payment)" upon Monsoon; or (2) Monsoon is otherwise liable to HMRC for such financial liabilities; and where, either of those two cases having arisen, Monsoon has incurred costs and expenses relating to those cases. It is no part of Monsoon's counterclaim that either case (1) or case (2) has arisen, nor that the costs and expenses claimed flow from such cases; and accordingly it is not entitled to an indemnity from Clipper under clause 13.1.1 of the Settlement Agreement simply in respect of "costs and expenses" allegedly incurred."

41. The Preliminary Issue seeks a determination of whether this is the correct construction.

7 Mr Grant's submissions

42. In Section H of his skeleton argument Mr Grant makes the following points:

Commercial Purpose.

43. He submits that the commercial purpose of the Settlement Agreement was to achieve finality. He submits that Monsoon's interpretation of clause 13.1.1 is a very wide one because (in his submission) it enables recovery of costs and expenses in respect of any breach of clause 7.1.7 of the Agreement. It is, he submits, also contrary to the common sense of the situation to allow claims for costs and expenses for any breach of clause 7.1.7 of the Agreement. The whole purpose of clause 13 of the Settlement Agreement was to limit the claims that could be made by Monsoon.

Together with

44. He submits that the use of the words "together with" import a vital linkage between the indemnity which clause 13.1.1 is "about" and the "costs and expenses". These words are, it is suggested, in themselves determinative of the proper construction of clause 13.1.1. He makes the point that the phrase appears at the end of the phrase and it would, he submits, be strange if a new free standing indemnity were to be buried at the end of such a lengthy clause. He referred me to both Stroud's Judicial Dictionary and Words and Phrases to support his submission that the words "together with" mean "in union with" or "in company with".
45. He referred me to the decision of the Court of Appeal in Joel v Rogerson [1943] Ch 311. In that case the court was concerned whether a bequest in a will of "my house at 74 Brook Street together with the contents" constituted one gift or two gifts. The judgment of the court included the following:

"Apart from authority the bequest appears to constitute one gift, for the bequest is of the house together with its contents. The ordinary meaning of the words "together with" as stated in the Imperial Dictionary is "in union with," "in company with." Apart from any other context when a testator makes a gift of a house and the furniture in it he would seem to be giving the furniture because it is situated in the house and goes to make up one whole which the testator knows as his furnished house."

46. Mr Grant acknowledges, of course, that the facts of that case are very different.

Difference in terminology from clause 7.1.7 of the Agreement

47. Mr Grant makes the point that the Settlement Agreement superseded the Agreement. He makes the point that clause 13.1.1 is narrower than clause 7.1.7 of the Agreement with the result that the parties must be assumed to have agreed a narrower indemnity.

Surplusage

48. As the same words appear at the end of both clause 13.1.1 and clause 13.1.2 it is a necessary consequence of Monsoon's construction of the clause that the words at the end of clause 13.1.2 are mere surplusage. He referred me to a passage from SA Maritime et Commerciale of Geneva v Anglo-Iranian Oil Co Ltd [1954] 1 WLR 492, where Somervell LJ said at 495:

"Although one finds surplusage in contracts, deed and Acts of Parliament, one leans towards treating words as adding something, rather than as mere surplusage"

49. Given the structure of clause 13.1 Mr Grant submits that this is unlikely.

Clause 13.1.3

50. The structure of clause 13.1.3 is of course different from clause 13.1.1. However there would again be surplusage if Monsoon's construction were to be correct.

8 Mr Morgan's submissions

51. In paragraph 15 of his skeleton argument Mr Morgan, on behalf of Monsoon, summarises what he submits to be the real issue between the parties:

Whether the clause means that Monsoon must get to the stage where it is already liable and/or fines and penalties are imposed by HMRC before it can claim an indemnity (as Clipper contends) or whether Monsoon can claim to be indemnified for costs and expenses incurred in remedying failures by Clipper of its obligations under the Agreement before that stage is reached, or to put it another possible way, in reasonable mitigation and/or avoidance of the consequences of breaches by Clipper under clause 7.1.7 of the Agreement, for instance those that might in the future lead to the imposition of fines or penalties.

52. In support of Monsoon's construction he relies on the following matters (most of which have already been touched on earlier in this judgment)

Together with

53. The crucial phrase at the end of clause 13.1.1 is "together with any costs and expenses (including but not limited to professional fees) properly incurred which result from such failure". The words "such failure" plainly refer to the failure to perform the obligations under clause 7.1.7 of the Agreement. He submits that the words "together with" show that the costs and expenses are not dependent upon the pre-existence of interest fines and/or penalties

Clause 13.2

54. The expenses referred to in clause 13.2 were not dependent on the existence of any fines or penalties. These monies were paid "in respect of the indemnities at clause 13.1.1 and 13.1.2". This shows that at the time the parties envisaged that claims could be made under clause 13.1.1 even though there was no existing fine or penalty.
55. Mr Grant sought to answer this point both in his skeleton argument and in his oral submissions. He made the point that the payment under clause 13.2 was made without any admission of breach, that it was part and parcel of a hard fought compromise and that only 75% of the claimed costs and expense were paid. It is thus of limited assistance in determining the true construction of clause 13.1.1.

Paragraph 3(1) of Schedule 3

56. Monsoon rely on this paragraph as part of the matrix of facts known to the parties at the time of the Settlement Agreement which can be taken into account as an aid to construction.
57. In particular the parties knew that bond and duty issues were being actively being investigated by HMRC and that these could give rise to claims under clause 13.1 of the Settlement Agreement.

Paragraphs 3(5) and 4 of Schedule 3

58. Reliance was placed on the word "or" in paragraph 3(5) and the four separate situations identified in paragraph 4. In effect Mr Morgan submitted that these were further indications that the claim for "costs and expenses" was not dependent on the existence of a fine, demand or assessment.
59. In paragraphs 62 and 63 of his skeleton argument Mr Grant addresses these two paragraphs. He suggests the word "or" in paragraph 3.5 actually undermines Monsoon's case because it suggests that the claim for costs and expenses under clause 13.1.1 or 13.1.2 is different from a claim under 13.1.3. On Monsoon's construction they are the same. He suggests that words in a Schedule could not be of much assistance as an aid to construction of words in the main body of the agreement.

Common sense and commercial purpose

60. Contrary to the submission of Mr Grant Mr Morgan submits that the commercial purpose of the Settlement Agreement and common sense favour Monsoon's construction of clause 13.1.1. In effect this submission is a repeat of the point made in paragraph 15 of his skeleton argument.
61. As the parties were well aware of the Bond and Duty issues and that they could give rise to potential liabilities it is contrary to common sense and commercially inherently unlikely that Clipper would have agreed to indemnify Monsoon for costs and expenses if there was a fine, penalty or assessment raised but not to indemnify Monsoon for costs and expenses properly and reasonably incurred in an effort to avoid such a fine, penalty or assessment.
62. In support of this he referred me to the well-known guidance from Lord Hoffmann's speech in ICS v West Bromwich Building Soc [1998] 1 WLR 896, 912

My Lords, I will say at once that I prefer the approach of the learned judge. But I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 3 All ER 237 at 240-242, [1971] 1 WLR 1381 at 1384-1386 and Reardon Smith Line Ltd v Hansen-Tangen, Hansen-Tangen v Sanko Steamship Co [1976] 3 All ER 570, [1976] 1 WLR 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of 'legal' interpretation has been discarded. The principles may be summarised as follows.

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having 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.

(2) The background was famously referred to by Lord Wilberforce as the 'matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352, [1997] 2 WLR 945.

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1984] 3 All ER 229 at 233, [1985] AC 191 at 201:

'... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.'

9 Discussion and Conclusion

63. I have set out the rival arguments in some detail because they do, as it seems to me, summarise the arguments in favour of the rival constructions of clause 13.1.1. Although I have not found the resolution of the question straightforward and to some extent my mind has wavered during the course both of the hearing and during the time I have been considering the judgment I have ultimately come to the conclusion that Mr Morgan's arguments are to be preferred. My reasons are as follows:

I prefer the views of Mr Morgan on the common sense and commercial purpose of the Settlement Agreement. Like Mr Morgan I think it unlikely that the parties would have agreed that Clipper would indemnify Monsoon where there was an actual fine, penalty or assessment but not where Monsoon took reasonable steps to mitigate its loss to avoid such a fine, penalty or assessment.

Contrary to the submission of Mr Grant I do think that clause 13.2 favours Monsoon's construction. I take on board each of Mr Grant's comments. The fact remains that Clipper agreed to pay 75% of the costs of Ms Harwood and Mr Dudley in a situation where there was no assessment fine or penalty. The payment was the cost and expense claims in respect of the indemnities at clauses 13.1.1 and 13.1.2 up to the date of this Settlement Agreement. Even though there was no admission of breach, and the agreement was part of a compromise clause 13.2 still seems to me to be an acknowledgment that costs such as those incurred by Ms Harwood and Mr Dudley were within clause 13.1.1 even though there had been no relevant fine, demand or assessment.

Whilst I accept that the words "together with" can have the meaning ascribed to them by the Court of Appeal in Joel v Rogerson, I note that the OED definition of "together with" is

Along with; in combination with, in addition to, or with the addition of; in company or co-operation with; at the same time as, simultaneously with.

Joel v Rogerson was of course a very different case involving the construction of a provision in a will. I do not regard it as of very much assistance in determining the meaning of clause 13.1.1 of the Settlement Agreement. Mr Grant may be right in suggesting that there must be some link between the interest fine or penalty at the beginning of the clause and the costs and expenses at the end. Where I part company from his submission is that I do not accept that the link has to be as strong as an actual fine, assessment or penalty. To my mind it is sufficient if the costs and expenses are incurred in an effort to avoid such a fine.

As is pointed out by Mr Morgan there is nothing in the final part of clause 13.1.1 that provides that it is dependent on an actual fine, penalty or assessment and it would have been perfectly easy so to provide. All that is necessary is that the costs and expenses are caused by the breach of clause 7.1.7 of the Agreement.

On this view of the clause all of the surplusage arguments fall to the ground.

I did not, myself, derive much assistance from paragraphs 3.5 or 4 of Schedule 3.

64. In the result I would answer the question posed in the preliminary issue in the negative.