Wood v Sureterm Direct Ltd12

Summary: The court held that an indemnity clause under a sale and purchase agreement should be given its plain meaning, even if it is uncommercial for one party.

The Claimant and Defendant entered into a sale and purchase agreement (SPA) under which the Defendant indemnified the Claimant “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, 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”.

Following the completion of the sale of the target company, the company became aware of potential mis-selling practices carried out by the previous owners. The company undertook an internal investigation and, following this, both the company and the Claimant were obliged to inform the Financial Services Authority of their findings. As result, the company and the buyer became liable under the SPA to pay a substantial amount of compensation to customers.

The Claimant brought proceedings seeking to claim the amount payable under the indemnity from the Defendant. The key issue was whether the indemnity covered compensation paid arising out of self-reporting by the company, as opposed to claims or complaints registered with the FSA.

The Court of Appeal held that the relevant principles for consideration were those in Arnold v Britton13. As a result, the court considered the ordinary and natural meaning of the indemnity and found that the indemnity excluded claiming for self-reporting. The court added that there was no real basis linguistically or grammatically to interpret the indemnity in another way.

Additionally, the court rejected the buyer’s argument that this interpretation would lead to an uncommercial result for the buyer because it is not the Court’s role to make good a poor deal.

The Court of Appeal highlighted that business people often make bad bargains for a variety  of reasons (for example being in a weak negotiating position) and it is not the court’s place to reject the natural interpretation of a clause for the purposes of achieving what it perceives to be a more commercial outcome.

The decision emphasises that the courts will look to the wording of the contract and commercial business sense does not override plain words in a contract.