In Andrew Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd  the Court of Appeal considered an indemnity clause in a share purchase agreement (SPA). Reversing the High Court’s decision, the Court of Appeal held that the interpretation of the indemnity should be determined by the natural meaning of the wording.
In April 2010 Capita Insurance Services Ltd (Buyer) purchased the entire share capital of Sureterm Direct Ltd (Company) from Mr Andrew Wood and two other individuals (together Sellers) pursuant to the SPA. The Company’s business was insurance broking, primarily offering policies to the classic car market.
Clause 7.11 of the SPA contained an indemnity which obliged the Sellers to indemnify the Buyer 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
[(A)] following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person [an employee or former employee]
[(B)] 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 of service.”
Note: numbering and lettering has been added for illustrative purposes. In the SPA, the wording appeared as a single clause without the numbered or lettered paragraphs shown above.
Following the sale of the Company, a number of the Company’s employees raised concerns about the way sales were conducted. In particular, that certain customers had paid substantially more than they had initially been quoted in circumstances where neither their risk profile nor the underwriting premium had changed significantly. The Company had significantly increased its own fees without informing the customer of why the quotation was increasing. In response to these concerns, the Company conducted an internal review and reported its findings to the FSA (as it then was) as it was obliged to do. The FSA concluded that customers had been treated unfairly, had been misled and that detriment had occurred and that redress was due.
The Buyer and the Company agreed with the FSA to conduct a customer remediation exercise for those customers identified as potentially affected by the Company’s mis-selling (the Remediation Scheme) and Deloitte LLP was appointed to provide independent validation of the Remediation Scheme. Compensation was paid to customers of around £1.35 million. The total claim, however, including interest and the costs of the Remediation Scheme was in excess of £2.4 million.
The Buyer sought to recover this amount from the Sellers relying on the indemnity in the SPA. The Sellers disputed their liability, arguing that they had no obligation to repay under the indemnity as the requirement to pay compensation had arisen not from a legal claim raised by clients; nor from a complaint made by clients; but as a result of the referral by the Buyer and the Company of the findings of the review to the FSA; the requirement by the FSA that compensation should be paid to the Company’s clients and the agreement with the FSA to put into effect the Remediation Scheme. Accordingly, the losses fell outside the wording of Clause 7.11.
Opposing interpretations of Clause 7.11
The Buyer argued that the clause should be read so that, using the illustrative numbering and lettering shown above, (A) was linked to and qualified (2) but not (1), whilst (B) qualified both (1) and (2). The important point was that (A) did not qualify (1). On this basis, the Buyer could recover its loss under (1), notwithstanding that there was no claim or complaint against the Company, the Sellers or a Relevant Person within the terms of (A).
Mr Wood, on the other hand, argued that (1) and (2) were both qualified by both (A) and (B). On this basis the Buyer would not be entitled to recover if there had been no claim or complaint made against the Company, the Sellers or a Relevant Person within the terms of (A).
Mr Wood’s interpretation also involved (A) being interpreted as reading:
“following and arising out of claims, orcomplaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person”
This interpretation meant that a claim does not have to be a claim that is registered with the FSA and includes any ordinary legal claim in relation to which the FSA had no involvement, which is consistent with the fact that the FSA does not entertain claims by customers.
In summary, the High Court, therefore, had to decide whether the requirement for a claim or a complaint which had been registered with ‘the FSA, the Financial Services Ombudsman or any other Authority’ applied to the whole indemnity (i.e. (1) and (2)), or just the second limb (i.e. (2)). If the requirement applied to the whole indemnity the Sellers would not be liable.
High Court decision
The High Court preferred the Buyer’s interpretation and the Sellers were therefore held to be liable under the indemnity.
The judge, Popplewell J, preferred the Buyer’s construction for three main reasons, which were:
- the Buyer’s construction was supported by the language of (2) and its overlap with (1);
- the Buyer’s construction was supported by the commercial context and the practical consequences of the rival contentions. There was no good reason why the indemnity should not be engaged in the context of the FSA investigation. The obligation to indemnify ought also to arise if the FSA became involved as a result of a whistle-blower or an FSA investigation as a result of perceived market-wide mis-selling. It was in the nature of mis-selling claims that customers who had been mis-sold are commonly unaware of that fact prior to a regulatory investigation and may never have made a claim or lodged a complaint; and
- a number of more minor linguistic and syntactical points.
Mr Wood appealed.
Court of Appeal decision
Christopher Clarke LJ said in his judgment that although dividing the clause into component parts was a useful aid, the parties did not write their contract in that way and the clause should be looked at as a whole in its original form.
The process of interpretation
The principles which underpin contractual interpretation were recently restated by the Supreme Court in Arnold v Britton . These include:
- The court looks to see where different conclusions 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.
- In a case 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 is entitled to prefer a construction which is consistent with business common sense and to reject one that is not.
Business common sense
Care must be taken in using ‘business common sense’ in determining construction. What is business common sense may depend on the standpoint from which you ask the question. The court will be unaware of the negotiations which have taken place between the parties. What may appear, at least from one side’s point of view, as lacking in business common sense, may be the product of a compromise which was the only means of reaching agreement between the parties.
Businessmen sometimes made bad or poor bargains for a number of different reasons such as a weak negotiating position, poor negotiating or drafting skills or inadequate advice. It is not the function of the court to improve their bargain or make it more reasonable by a process of interpretation which amounts to rewriting it. The purpose of interpretation is to identify what the parties have agreed.
The commercial context
Christopher Clarke LJ said in his judgment that other considerations needed to be taken into account and referred to the fact that the Buyer had the benefit of warranties in the SPA and that mis-selling or suspected mis-selling prior to completion was highly likely to have amounted to a breach of warranty. The Buyer’s ability to recover in respect of mis-selling was not, therefore, dependant on the indemnity.
Also, the indemnity was not limited by time and was uncapped and it wasn’t therefore surprising that it was limited to claims brought by a client. Although this may not have been ideal from the Buyer’s standpoint, this was not a circumstance which should result in a different interpretation of the words used.
The Court of Appeal reversed the High Court decision, preferring the interpretation of the indemnity put forward by Mr Wood. On that basis, for the indemnity to be engaged, there needed to be either:
- a claim made against the Company, the Sellers or a Relevant Person; or
- a complaint registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person.
In both of these scenarios the claim or complaint must:
- relate to the period prior to completion of the acquisition in accordance with the SPA; and
- pertain to the mis-selling or suspected mis-selling of any insurance or insurance related product.
Neither i nor ii had occurred. There was no claim by a customer, rather the loss suffered, which included the compensation paid out to customers, had resulted from the Company self-reporting the findings of its internal review of potential mis-selling to the FSA.
As mentioned above, the Court accepted that this interpretation, although somewhat tautological (‘claims…following and arising out of…claims’) meant that the claim does not have to be a claim against the Company which is registered with the FSA, the Financial Services Ombudsman or any other Authority. It covers an ordinary legal claim in circumstances where there has been no involvement on the part of the FSA or any other Authority. This is consistent with the fact that the FSA does not entertain claims by customers (although the Ombudsman may do so).
This is another decision of an appellate court which underlines that the approach taken by the courts to contractual interpretation is to give the words their natural meaning, so that the court can identify what the parties have agreed. Whilst consistency with business common sense may be a useful guide in interpretation, it does not enable the court to re-write the contract and the natural meaning of the words must prevail. Sometimes businessmen make poor bargains and it is not the court’s role to interfere with the natural meaning of what the parties have agreed.