Wood v. Capita Insurance Services Ltd [2017] UKSC 24

In March 2017 the Supreme Court interpreted an indemnity clause in an agreement between Mr Wood (and two others) and Capita, for the sale and purchase of the entire share capital of an insurance brokerage company (the agreement).

Following the purchase, the company’s employees raised concerns about the company’s sales processes, leading the company to conduct a review, which identified that a number of customers had been missold insurance-related products in the period preceding the agreement. In compliance with its regulatory obligations, Capita reported the misselling to the (then) FSA. The FSA agreed with the company, and Capita, that a remediation scheme to provide redress to the customers affected would be implemented.

Capita alleged that the company’s misselling had caused it losses of some £2.4 million, and sought to rely in its claim against Mr Wood (the former managing director of the company) on an indemnity clause in the agreement. Mr Wood disputed certain of the allegations in relation to the company’s misselling, and argued that Capita’s losses fell outside the scope of the indemnity, on the basis that they were caused by Capita’s (and the company’s) own reporting to the FSA, rather than by claims or complaints made by customers.

Lord Hodge delivered the Supreme Court’s judgment, in which he stated that there had been no change in the court’s approach to contractual interpretation between the judgments in Rainy Sky SA v.Kookmin Bank [2011] 1 WLR and Arnold v. Britton [2015] AC 1619. The judgment went on to state that both a textual and contextual analysis can be used to assist interpretation of a particular clause. In the opaque and poorly drafted clause before it, the Supreme Court first considered the text and then went on to consider the context of the clause as whole, examining whether the wider factual matrix could give guidance to its meaning.

The court considered that the text supported Mr Wood’s position, and also found the context to be significant in this case. The court noted that the indemnity was in addition to detailed warranties that covered the misselling, and that these warranties were time limited (the time having lapsed by the time Capita made its claim).

Further, the parties were sophisticated and experienced in the relevant market, and, whilst Capita may not have been aware of the sales processes in place at the relevant time, that would not assist the court to determine the scope of the indemnity clause. The court found that it was not contrary to business common sense for parties to agree wide-ranging warranties, subject to a time limit, and also to agree a further indemnity not subject to a time limit, but triggered only in certain circumstances.

Based upon the above, the Supreme Court dismissed Capita’s appeal. In doing so it stated that whilst this may lead to the agreement being a poor bargain from Capita’s point of view, it was not the court’s role to improve that bargain.

The decision highlights the need for clear and precise drafting to avoid any uncertainties but also demonstrates the different tools available to the court when interpreting contracts.