Supreme Court interprets indemnity clause in the sale and purchase agreement of an insurance broker

The sale and purchase agreement for an insurance broker contained an indemnity clause in favour of the buyer for losses "following and arising out of claims or complaints registered with the FSA…against the Company…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". The issue here was that no complaint was made by a customer to the FSA. Instead, following an internal review, the buyer and seller sent the results to the FSA and the FSA then required compensation to be paid to customers. The seller argued that those circumstances fell outside the scope of the indemnity clause.

The Supreme Court (Lord Hodge delivering the leading judgment) reviewed recent caselaw and, in particular, the regard to be had to the commercial background of the contract. It was held that there had been no "rowing back" from the Supreme Court's decision of Rainy Sky v Kookmin. In the more recent Supreme Court decision of Arnold v Britton (in which it was said that "reliance placed in some cases on commercial common sense and surrounding circumstances … should not be invoked to undervalue the importance of the language of the provision").

Lord Hodge described the process of interpretation as "a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense…This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated…Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But …There may often …be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type".

Turning to the indemnity clause in question, it was held that, had the clause stood on its own, the requirement of a complaint by a customer and the exclusion of loss caused by regulatory action might appear to be anomalous. However, when looked at in the context of the agreement as a whole, "It is not contrary to business common sense for the parties to agree wide-ranging warranties, which are subject to a time limit, and in addition to agree a further indemnity, which is not subject to any such limit but is triggered only in limited circumstances". Accordingly, the Supreme Court found in favour of the seller and held that the indemnity clause had not been triggered.