The Supreme Court has dismissed an appeal in Wood v Sureterm Direct Ltd.(1) The court upheld the Court of Appeal's decision on the meaning of an indemnity clause and agreed with its application of established contractual interpretation doctrine. The decision confirms the established judicial approach to contractual interpretation: that is, the focus on the words of a given clause.
The appeal concerned an indemnity clause in a share purchase agreement dated April 13 2010. The agreement concerned the sale and purchase of the entire issued share capital of Sureterm Direct, a specialist insurance broker in the car insurance market. The clause stipulated:
"The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer and each member of the Buyer's Group against all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by the Company following and arising out of claims or complaints registered with the FSA [Financial Services Authority], the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person 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 or service." (Emphasis added.)
Andrew Wood (former managing director) was the respondent seller. Wood owned 94% of Sureterm's share capital. Capita Insurance Services Ltd was the appellant purchaser.
Shortly after completion, Sureterm's employees raised concerns about the company's sales processes. This led Capita to conduct an internal review, which revealed that in many cases the company's telephone operators had misled customers in order to secure a sale.
Capita and Sureterm were obliged to inform the FSA of the findings and did so on December 16 2011. The FSA concluded that Sureterm's customers had been treated unfairly and were entitled to compensation. Capita agreed to introduce a customer remediation scheme, under which compensation was paid. Capita brought proceedings against Wood pursuant to the indemnity in the share purchase agreement, claiming £2,432,883.10, comprising an estimate of the compensation at £1.35 million, interest of approximately £400,000 and the costs of the remediation scheme.
Capita claimed that the indemnity entitled it to recover from Wood, on the basis that payments had been made by Sureterm as a result of the FSA notification and investigation. Wood's defence was that the indemnity applied only when customers themselves made a complaint to the FSA.
At first instance, the Commercial Court found in favour of Capita, holding that its construction of the clause made commercial sense. Its decision was overturned in the Court of Appeal. The Court of Appeal held that, despite the "inelegance" of Wood's construction of the clause, the language was sufficiently clear to support an interpretation that reflected the commercial consequences of the parties' bargain.
No rowing back from Rainy Sky The Supreme Court (in a unanimous decision) was clear that Capita's submissions as to the Court of Appeal's over-emphasis on the wording of the share purchase agreement were not accepted. It confirmed settled Supreme Court authority on contractual interpretation, and that Arnold v Britton(2) did not involve a "rowing back" from the court's guidance in Rainy Sky SA v Kookmin Bank,(3) noting that "[t]extualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation".
The Supreme Court confirmed that a court's task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement – not to perform a literalist exercise focused solely on a parsing of the wording of a particular clause. The court must consider the contract as a whole to reach a view of the objective meaning.
The court also emphasised that special attention should be given to the quality of the drafting and the possibility that one party agreed to something which in hindsight did not serve its interest. He also highlighted the iterative process that a court takes: namely, checking the interpretation of a clause against the other provisions of the agreement and a clause's commercial consequences.
Interpretation of indemnity provision The court stated that the indemnity clause had not been drafted with precision and its meaning was therefore avoidably opaque. It went on to state that its reading of the indemnity was consistent with the Court of Appeal's approach: that the clause arose out of claims against Sureterm notified to the FSA by Sureterm's customers.
Further, the factual matrix was significant. On Capita's approach, the identity of the persons against which the relevant claims could be made (so as to trigger the indemnity) would be left to implication. There must be a limit, as it would be absurd for Capita to have an indemnity claim against Wood resulting from any mis-selling on its part before completion.
It was also relevant that the indemnity appeared alongside "detailed warranties" in the share purchase agreement in relation to mis-selling. This led to the Supreme Court considering arguments on the commercial nature of the time limits of those potential warranty claims. The Supreme Court held that it was not contrary to business common sense for parties to agree wide-ranging warranties (subject to a time limit on claims) and to agree to a more limited (but not time-limited) indemnity.
Ultimately, the court held that although from Capita's standpoint the share purchase agreement might be a poor bargain, it was not the court's function to improve that bargain.
The Supreme Court's decision is on one level unsurprising, in that it confirms the senior courts' approach to established contractual interpretation doctrine. As such, the decision is one of continuity, rather than change. However, it also offers a glimpse of the approach of the Commercial Court where a more commercial outcome was proposed.
It is likely that bad bargains will continue to be upheld where – adopting the principles confirmed by the Supreme Court in this case – the outcome of the contractual interpretation exercise is clear. For commercial parties and practitioners, this decision once again underlines the need for clear and unambiguous drafting.
For further information on this topic please contact Geraldine Elliott or Matthew Evans at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.