Last year, we reported on a High Court decision on the proper interpretation of an indemnity in a share sale agreement relating to an insurance broker.  Following an appeal, the Court of Appeal has recently reversed the decision, finding this time in favour of the seller (who claimed, of course, that the indemnity did not apply).  The court's thinking sets out a range of additional considerations that a good draftsman should have in mind when crafting an indemnity. These are as follows:

  • In interpreting the indemnity clause, the court's aim is to determine what a reasonable person (in possession of all the background knowledge reasonably available to the parties when they contracted) would have understood the parties' intentions to have been.
  • Care should be taken in using business common sense as a determinant. The fact that the deal might have been a poor one for the buyer did not mean that the indemnity clause should be interpreted in the way the buyer contended. The court was not privy to the negotiations between the parties, and what might appear to be lacking in common sense from one party's point of view might have been the product of a compromise necessary to reach agreement. Businessmen sometimes make bad bargains because of a weak negotiating position or poor drafting skills, and it was not for the court to improve their bargain or make it more reasonable by re-writing it. A balance should be struck between the indications given by the language and the implications of rival constructions. The clearer the language, the less appropriate it would be to construe it so as to avoid an "un business-like" result. The more un business-like the result of any particular interpretation, the more likely the court could favour an alternative interpretation. Thus, if the natural reading produced an un business-like result, the court might favour a less obvious reading, though business common sense was not to be invoked to undermine the importance of the natural language.
  • Although there was no good commercial reason to exclude the disputed matters from the scope of the indemnity, certain other facts suggested that it was indeed appropriate to do so, which include: (i) the buyer's recourse in respect of mis-selling was not dependent solely on the indemnity - the buyer would likely have a claim for breach of warranties (and damages as a result); and (ii) the indemnity was not subject to any monetary limit, suggesting that its scope was intended to be narrower (rather than wider).

Whilst these developments are interesting, we would never recommend reliance on these interpretive factors alone.  Indeed, I would not be surprised to see this latest decision appealed. As ever, there isn't much that can trump clear and comprehensive drafting; it is always worth spending a little lawyer time 'up front' to get these important clauses right.