[co-author: George Bamber]

Be aware of drafting (or seeking to interpret) a contractual indemnity provision in isolation.  Appreciating the wider contractual context will avoid surprises.

The Supreme Court has held that the indemnity clause in an SPA did not operate to indemnify the buyer of an insurance broker against compensation paid to customers as a result of mis-selling.

Facts

Under a SPA dated April 2010, Capita (the “Buyer“) agreed to purchase the share capital of Sureterm Direct Limited (“Sureterm“), a specialist insurance broker, from Mr Wood (the “Seller“).  Clause 7.11 of the SPA was an indemnity clause which provided as follows:

“The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer […] 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 [relevant Regulator (i.e. FSA, FOS)] […] 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.”

Shortly after the purchase, Sureterm’s employees raised concerns about the company’s sales process.  Following an internal review, it was found that Sureterm had misled many customers and the Buyer and the Seller notified the FSA (now the FCA) of their findings.  Sureterm agreed a remediation plan with the FSA involving the payment of compensation to the affected customers.  The important point to note is that there had been no complaints or claims by customers.

The Buyer asked for an indemnity on the basis of clause 7.11 however the Seller argued that the circumstances fell outside the scope of the indemnity clause; the requirement to compensate had not arisen out of a claim/complaint to any Regulator from Sureterm’s customers.  The Court of Appeal agreed with the Seller on the basis that clause 7.11 did not extend beyond losses “arising out of claims or complaints”.

The Buyer disputed the Court of Appeal’s decision.  It argued that the two major recent cases concerning contractual interpretation, Arnold v Britton and Rainy Sky SA v Kookmin Bank, were inconsistent.  Accordingly, the Court of Appeal had placed too much weight on the words of the SPA and not enough on the factual context.

Supreme Court’s Judgment

The Supreme Court dismissed the Buyer’s appeal.

Contractual Interpretation

The Supreme Court emphasised the common ground between Rainy Sky and Arnold v Briton.  The Buyer argued that Rainy Sky placed a greater weight on commercial common sense than the decision in Arnold v Briton, which emphasised the “natural meaning of the words used”.  However, the court stressed that its approach to contractual interpretation would be determined by the issues before it.  It will consider the contract as a whole and, depending on its nature and the quality of drafting, give more or less weight to the wider commercial context.

Lord Hodge stated:

“Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements.”

The Indemnity Clause

The Buyer argued that “all actions, proceedings, losses, claims, damages, costs, charges, expenses, and liabilities suffered or incurred” would trigger clause 7.11, whether or not claims or complaints had been registered with the Regulator.  The only requirements were that the relevant trigger:

1. related to the period prior to the completion date; and
2. pertained to any mis-selling or suspected mis-selling of insurance products.

The Seller’s argument remained unchanged, that clause 7.11 only applied to claims or complaints registered with the Regulator.  Considering these two contrasting interpretations, the Supreme Court emphasised the importance of precise and careful drafting.  In this case, the meaning of the indemnity provisions was ambiguous and parties should agree on clear wording at the outset to prevent disputes arising later down the line.

In making it’s decision, the Supreme Court relied, in part, on the separate warranties which were provided by the Seller elsewhere in the SPA.  These covered much of the same ground as the indemnity provisions however were more limited in time and quantum.  On this basis, the Supreme Court concluded that it was clearly the Seller’s intention to limit any further exposure after that time had elapsed.  The scope of the indemnity provisions had to be considered in the context of the SPA as a whole and had clause 7.11 been interpreted in isolation, the court may well have taken a different view.  By using this analysis, the court applied the “commercial common sense” expressed in Rainy Sky to colour it’s interpretation of the contract.

Some Thoughts

When drafting indemnity provisions, it is clearly important to get the wording right.  There is no substitute for clear and unambiguous drafting.  However, this case tells us that it is also important to appreciate the wider contractual context; this will be used by courts when assessing the parties’ intentions.

Parties should not jump straight to the specific indemnity clauses when considering the indemnity position under a contract.  Reflection will need to be given to the contract as a whole and assessment made to the indemnity provisions in conjunction with other relevant clauses, in this case the warranties.