The world of price comparison websites and the misleading of consumers who are buying insurance for classic motor cars lay behind this case: Wood v Sure Term Direct Limited and Capita Insurance Services Limited. It concerned the sale of an insurance brokerage and was decided by the Court of Appeal.
The murky world of insurance
Mr David Wood was the entrepreneur, behind Sureterm Direct which he started in 1998.
A few years before he sold out he was able to drive sales growth through leads generated through the confused.com price comparison website. Readers will remember that these sites featured in the press recently over “dodgy price comparisons” regarding deals for consumers over cheap electricity and gas contracts: the best deals were not shown on the website but hidden and accessible only to those who knew how to interrogate the website.
It appears that things were not all they seemed on pricing of the insurance of classic cars either. It was alleged that competitive quotes ended up being significantly higher when administration charges were added. The customer was led to believe that the administration charge was that of the insurance company not that of the broker. So cheap deals became much more expensive.
Mr Wood sold the company in April 2010 for £7.7m to the public service outsource giant, Capita, who were growing their own insurance brokerage business. Some of the £7.7m was deferred.
The case report does not say how much was deferred but this was not paid and Mr Wood eventually made a claim in the courts. The claim was made after the two year period in which Capita could bring a warranty claim.
Claims can often lead to counterclaims in this kind of dispute. Sure enough Capita’s lawyers issued a counterclaim but this was for a whopping £2.4m.
The extensive warranties given by Mr Wood to Capita included that there had been no breaches of financial services legislation in relation to sales to Sureterm’s customers. But Capita was relying on what looked like a hastily constructed indemnity clause which had been included in the Share Purchase Agreement. Perhaps Capita’s due diligence had identified the risk that the Financial Conduct Authority (as it is now) might not be happy with the techniques of the Sureterm sales team.
Indemnity Clause Analysed
The drafting of the indemnity clause in the Share Purchase Agreement left a good deal to be desired.
There had been no customer complaints. The language was tortuous, but 4 judges would all eventually conclude that the strict wording of the indemnity did not cover compensation paid arising from whistle blowing by an employee or arising from an investigation by the FSA. The enterprising Mr Wood (and indeed his lawyers) may have been surprised to find that Capita’s legal advice was that the indemnity should indeed cover payments made to customers from self-reporting by Sureterm.
It may be expected that a well-advised seller like Mr Wood would have been very reluctant to give such a blanket indemnity had it been asked for at the time of the share sale. After all it would have placed him at the commercial mercy of Capita who could use Mr Wood’s cheque book to buy off any problem with the regulator or buy customer goodwill by making compensation payments.
A Goliath unfairly helping itself to the cash from the pocket of David would likely be how Mr Wood would have viewed such an outcome.
Employee Whistle Blowers and the FSA Investigation
The facts were that shortly after Capita’s purchase of the company, certain employees had raised concerns about Sureterm’s sales processes. Perhaps with Mr Wood gone (he stayed on for a 6 month hand over period) the employees were emboldened to complain about practices they thought were wrong. The reported case does not make mention of this but suffice to say that in early 2011 Capita carried out a review of the sales process.
Capita concluded they must self-report as the regulator required them too. They informed the Financial Services Authority of their own concerns by November 2012. The FSA investigated using Deloittes as agent. The conclusion was that compensation of £1.35m must be paid. To that was added costs and interest to bring the claim to £2.4m.
Legal Battle in the Courts
Capita’s lawyers must themselves have felt exposed as by this time the two year period to bring a warranty claim had expired. The High Court found in favour of Capita. The Court decided it should not take a literal approach to the interpretation but should approach things with commercial considerations in mind. Choosing to ignore the strict wording, the Judge concluded that it would be uncommercial to read the indemnity in such a way as to exclude whistle blowing and company self-reporting or action taken by the FSA of its own accord.
But Mr Wood (or perhaps it was his lawyer’s insurers) took the decision to appeal to the Court of Appeal. Lord Justice Clarke in the Court of Appeal took a more pragmatic view. His two fellow Judges agreed. He had no difficulty in cutting through the semantic legal arguments and himself concluded that the proper literal construction was that claims arising from self-reporting were not, on the face of it, covered by the indemnity. He then turned his mind to whether considerations of commercial construction required him to adopt a different view and decide that the clauses be read differently from the language written down. He was not persuaded that he should depart from the express (albeit convoluted) language.
The Court concluded that was no reason in principle why “a bad bargain” struck by Capita and documented by their lawyers should be rewritten by the Court. The Judge may have had some sympathy too for Mr Wood facing the Goliath in Court, with Goliath pleading to have a legal agreement re-written. The fact that expensive lawyers had been engaged by both seller and buyer was highly relevant it seems.
The potential dangers of giving indemnities in a Share Purchase Agreement?
For Capita and its lawyers, the lesson to be taken from this is twofold. First not to have allowed the two year period to bring a warranty claim to have come and gone, and secondly to have drafted a much better indemnity clause that expressly covered claims arising from self-reporting.
Lawyers acting on the sale and purchase of regulated businesses have been warned: very clear drafting is needed. That drafting, of course requires, imagination and foresight and we all know hindsight is a wonderful thing.