Applying ‘business sense’ to interpretation of an indemnity
WOOD v SURETERM & CAPITA (CA) [2015]
The Court of Appeal (“CA”) has confirmed that the wording of an indemnity should be interpreted in accordance with its plain meaning, even if this makes the clause particularly uncommercial for one party.
Facts:
- A dispute arose in relation to the true construction of a clause in a sale and purchase agreement (“SPA”) for all the shares in an insurance broker, Sureterm (“S”). Mr Wood (“W”) was the managing director of S who sold his shares to Capita (“C”). Under the SPA, W agreed to indemnify C for losses relating to the mis-selling, or suspected mis-selling, of insurance products or services in the period before the share sale.
- Following the sale, C had various concerns about S' conduct before the acquisition and whether customers had paid more for insurance than they had been quoted. S and C were obliged to refer the findings to the Financial Services Authority (“FSA”) who concluded that mis-selling had occurred and that the customers concerned were due compensation. This resulted in approximately £1.35 million being paid to customers even though none of them had issued a claim of any kind or made a complaint against S – it was purely as a result of the self-referral to the FSA by S and C.
- C subsequently sought to recover the compensation paid and other related costs from W, relying on the indemnity in the SPA which read:
“The Sellers undertake to pay to [C] an amount … to indemnify [C] … against all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by [S] following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against [S], the Sellers or any Relevant Person and which relate 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.”
- W rejected this claim arguing that the indemnity was not intended to cover compensation paid due to S reporting itself to the FSA and maintaining that every type of loss listed in the indemnity clause was qualified by the wording, “…following and arising out of claims or complaints registered with the FSA…”. W therefore argued that it could not be liable under the indemnity unless an actual claim or complaint had been made and that since this had not happened the indemnity did not apply.
- C submitted that the clause should be broken up as follows:
"The Sellers undertake to pay to [C] an amount … to indemnify [C] … against
(1) all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and
(2) all fines, compensation or remedial action or payments imposed on or required to be made by the Company following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against [S] …
(3) and [in each case] which relate 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."
- On this basis, C could claim under (1) for losses and costs incurred before the Completion Date.
- The High Court (“HC”) 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.
Decision:
- The CA overturned the HC’s decision, saying that it preferred W’s interpretation and so 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.
- It referred to the relevant principles upon which contracts are to be interpreted:
- the Court’s aim is to determine what a reasonable person who had all the background knowledge which would reasonably have been available to the parties when they contracted would have understood the parties to have meant (Rainy Sky v Kookmin Bank (SC) [2011] and Arnold v Britton (SC) [2015]);
- the Court looks to see where different constructions lead, how they fit with other provisions in the contract (or other phrases in the same clause), what obstacles to a particular interpretation are met upon the way and what results are reached;
- where, as here, parties have used language which is capable of more than one meaning, the Court should consider the implications of the rival constructions and can prefer a construction which is consistent with ‘business common sense’ and reject one that is not;
- however, care must be taken in using ‘business common sense’ to decide how a provision should be interpreted. What is business common sense may depend on the standpoint from which the question is asked. The Court will not be aware of the parties’ negotiations so what may appear, at least from one side's point of view, as lacking in business common sense, may be due to a compromise which had to be reached;
- sometimes bad or poor bargains are made for a number of different reasons but it is not the Court’s function to improve the bargain or make it more reasonable by a process of interpretation which amounts to rewriting it;
- the clearer the language the less appropriate it may be to construe it so as to avoid a result which could be characterised as ‘unbusinesslike’.
- Applying these principles, the CA said it had preferred W’s interpretation because:
- it was necessary to look at the structure of the indemnity read as a whole in its original form, not divide the clause up into its component parts and suggest which parts should relate to other parts. The parties had not written the SPA in this way;
- by doing this the clause most naturally started with an obligation to indemnify against two categories of loss or events giving rise to loss: (1) "all actions, proceedings … suffered or incurred" and (2) "all fines, compensation or remedial action ... required to be made by [S]". These were then qualified that they must:
- follow and arise out of a claim or complaint registered with the FSA etc;
- relate to a period before the Completion Date; and
- relate to the mis-selling of insurance or a related product or service.
- Applying C’s construction would have meant the indemnity was incoherent, as it failed to specify any entity against which an action must be brought in the case of a claim started without any FSA involvement. Also, the fact that the deal may have been a poor one from C's view, was not something which should dictate a different interpretation from that which the Court concluded.
- The judge commented that there was an element of tautology in the drafting which was sometimes seen in commercial contracts but this did not affect the validity of his interpretation.
Points to note:
- At first glance this would seem to be fairly harsh on C. However, as the judge commented, one aspect of the commercial context that was considered was that under the SPA W had also given warranties relating to compliance with all applicable financial services laws and that it had no reason to believe any action would be taken against it based on any non-compliance of those laws. Mis-selling or suspected mis-selling prior to completion was highly likely to amount to a breach of one or both of those warranties. Consequently C could claim damages for breach of warranty so its entitlement to recover in respect of mis-selling was not dependent on bringing the case within the indemnity. This case may therefore have been influenced by the fact this was an indemnity which one might perhaps expect to be scrutinised very carefully and interpreted restrictively.
- This decision confirms that it is not within the Court’s remit to give a particular meaning to a provision just because it would otherwise result in a bad bargain from one party’s point of view (although there are plenty of examples of past cases where one might suggest that has, in reality, happened).
- C appealed to the Supreme Court in 2017 but its appeal was dismissed.