Interpretation of an indemnity clause
WOOD v CAPITA INSURANCE (SC) [2017]
In 2015, the Court of Appeal (“CA”) found that on the proper interpretation of an indemnity in a share purchase agreement, no liability arose because the trigger event had not occurred. The decision was the subject of a further appeal to the Supreme Court (“SC”). An indemnity is an express obligation on one party to compensate the other contracting party for some defined loss or damage arising from a particular trigger event, by making a monetary payment to that other party.
Facts:
- We featured the CA case in our January 2016 Update. In brief the facts were as set out below.
- Capita (“C”) entered into a share purchase agreement (“SPA”) with Mr Wood (“W”) in relation to the acquisition by C of his shares in an insurance broker, Sureterm (“S”).
- The SPA contained an indemnity under which W agreed to indemnify C against all claims, damages, costs etc, and all fines, compensation etc or remedial action or payments imposed on S due to claims or complaints registered with the Financial Services Authority (“FSA”) against S and which related to the period prior to the completion date pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product or service.
- After the sale, S carried out an internal review of past sales and reported its findings to the FSA in accordance with applicable regulatory requirements. The FSA concluded that S's customers had been treated unfairly, and redress was due accordingly. S and C subsequently agreed with the FSA to conduct a customer remediation exercise for those affected by the mis-selling, which included paying approximately £1.35million in customer compensation. C then sought to recover this sum from W under the terms of the indemnity.
- W argued that on the proper construction of the SPA, the indemnity was not triggered as the requirement to compensate arose from S self-reporting suspected mis-selling to the FSA, and not as a result of a claim by S's customers or a complaint by those customers to the FSA.
- The High Court preferred C’s construction as, amongst other things, it was considered appropriate in light of the commercial context. Also, there was no good reason why the trigger for the FSA investigation should determine W’s obligation to indemnify in respect of the consequences of that investigation. The indemnity should apply whether it was activated by whistleblowing, self-reporting or the FSA undertaking an investigation of its own accord. This was particularly so given that it was in the nature of mis-selling claims that customers who have been mis-sold are commonly unaware of the fact before a regulatory investigation and may never have lodged a complaint or claim.
- W appealed to the CA which decided that it preferred W’s interpretation. This meant that W could not be liable under the indemnity in the absence of a customer claim or any complaint of mis-selling of an insurance-related product being made to a relevant authority.
- C appealed to the SC.
Decision:
- The SC unanimously dismissed C's appeal, concluding that on its proper construction, the indemnity was not triggered in circumstances where S self-reported mis-selling to the FSA.
- It said that the Court’s task is to ascertain the objective meaning of the language used in the contract. This is not just a literal exercise focused solely on the wording of the particular clause. The Court must consider the contract as a whole and, depending on its nature, formality and quality of drafting, give more or less weight to elements of the wider context.
- Some agreements might be successfully interpreted principally by textual analysis (for example, due to their sophistication and complexity, or where they have been negotiated and prepared with the input of skilled professionals), while the correct interpretation of others might demand greater emphasis on the factual matrix (for example, due to their informality, brevity or the absence of skilled professional assistance).
- Here the SPA was a detailed and professionally drafted contract and all of the parties were commercially sophisticated and experienced. Applying this approach to construction to the indemnity in the SPA, the SC found that:
- it was necessary to place the clause in the context of the contract as a whole;
- the SPA might have become a poor bargain for C, but it was not the Court's function to improve that bargain;
- the circumstances triggering the indemnity were to be found principally in a careful examination of the language which the parties had used.
Points to note:
- The theme emerging here is echoed in the approach the Courts have taken recently to the subject of the implication of duties of good faith. Where a contract is more detailed, has been drafted and negotiated using professional advice between sophisticated businesses, the Courts will focus more on the specific wording of the clause and will be less prepared to imply a term of good faith.
- Where the contract is more ‘high level’ and has been agreed without significant professional input, the Courts are more willing to take a more interventionist approach, look at the broader context and, in a very limited number of cases, imply general duties of good faith.
- The dispute in this case highlights three particular areas which those drafting contracts need to pay particular attention to:
- firstly, pay attention to the inter-relationship between warranties and indemnities dealing with the same subject matter, albeit in slightly different terms, and consider carefully whether those differences in drafting are deliberate;
- secondly, consider very carefully the relationship of different parts of a single clause to each other. Here the indemnity was contained in a single sentence running to approximately 120 words. The sentence was not broken down in the drafting into primary provisions and sub-clauses which might have been helpful in terms of ascertaining the inter-relationship of different sections with each other;
- thirdly, review drafting to ensure that all of the words used serve a purpose. In a very detailed and seemingly comprehensive contract, the Courts are more likely to assume that where words have been included, they have been included for a deliberate purpose. If words are redundant or simply repetition, it will generally be better to leave them out.