Contractual interpretation of indemnities
In the recent case of Wood v Capita Insurance Services Limited, the UK Supreme Court decided on an appeal relating to the interpretation of an indemnity clause in a share purchase agreement (the SPA) entered into in April 2010 in connection with the purchase by Capita Insurance Services Limited (Capita) of the entire issued share capital of Sureterm Direct Limited (the Company).
The Company’s principal business was acting as a specialist insurance broker offering motor insurance for classic cars. After completion of the share transfer, employees of the Company raised concerns relating to the sales processes previously used by the Company. After a review, it was established that in a number of cases the Company’s telephone operators had mislead customers in order to secure sales. As they were obliged to, the Company and Capita notified the Financial Services Authority (the FSA; now the Financial Conduct Authority) of the findings and ultimately agreed with the FSA that a remediation scheme would be implemented by the Company under which certain customers would receive compensation.
Clause 7.11 of the SPA provided for an indemnity in favour of Capita in respect of losses “...arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, …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 products.”
Capita brought a claim against the sellers under clause 7.11 of the SPA, alleging losses in excess of £2,000,000. At the Court of Appeal, Mr Wood who prior to the share transfer had owned 94% of the Company’s shares and had been its managing director, successfully overturned the initial ruling in the case on the basis that the requirement to compensate the customers of the Company was not the result of a claim or complaint to the FSA or another public authority.
Capita appealed against the Court of Appeal’s decision, arguing that the Court’s contractual interpretation had placed too much emphasis on the words of the SPA and insufficient weight to the factual matrix. The Supreme Court unanimously dismissed Capita’s appeal.
In his lead judgement, Lord Hodge, noting that the SPA also contained wide ranging warranties relating to compliance and regulatory matters which would have captured the mis-selling, stated:
- As has long been accepted, “the court must consider the contract as a whole and, depending on the nature, formality and quality of the drafting, give more or less weight to elements of the wider context in reaching its view as to that objective meaning.”
- It is therefore not enough to consider the indemnity clause in isolation. Instead, it is necessary to place the indemnity clause “in the context of the contract as a whole, to examine the clause in more detail and to consider whether the wider relevant factual matrix gives guidance as to its meaning in order to consider the implications of the rival interpretations”.
- The scope of the indemnity, breach of which gives rise to a liability which is unlimited in time, must be assessed in the context of the time-limited warranties (warranty claims had to be brought within two years following completion of the SPA).
The Court concluded that, had the indemnity clause stood on its own, the requirement in that clause of a claim or complaint by a customer and the exclusion of loss caused by regulatory action “might have appeared anomalous”. However, read in the context of the warranties, it was “not contrary to business common sense for the parties to agree wide-ranging warranties, which are subject to a time limit, and in addition to agree a further indemnity, which is not subject to any such limit but is triggered only in limited circumstances.”
Having considered the indemnity clause in the context of the contract as a whole, the Court therefore ultimately relied on the literal meaning of the clause and held that Capita’s loss caused by the mis-selling practice was not captured by the indemnity clause. It would have been covered by the warranties but as Capita had failed to bring a claim within the required time period of two years, the appeal was dismissed.
The full UK Supreme Court case in Wood v Capita Insurance Services Limited  UKSC 24 can be accessed here.
For further information please contact Charlotte Barker at email@example.com.