UK: The Supreme Court Offers Useful Guidance On How Best To Interpret Contracts

Last Updated: 3 May 2017
Article by Tom White

The Supreme Court considers the meaning of an indemnity clause and emphasises that textualism and contextualism are not conflicting paradigms when it comes to contractual interpretation.

The Supreme Court handed down judgment in Wood (Respondent) v Capita Insurance Services Limited (Appellant) [2017] UKSC 24 on 29 March 2017. The Court unanimously dismissed the Appellant's appeal. It confirmed that textualism and contextualism are not conflicting paradigms when it comes to contractual interpretation, and that the previous leading authorities on contractual interpretation, Arnold v Britton [2015] AC 1619 and Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, were saying the same thing.

Background

The issue in dispute was the interpretation of an indemnity provision set out in Clause 7.11 of a sale and purchase agreement ("the SPA") dated 13 April 2010 for the sale of shares in a company called Sureterm Direct Limited ("the Company") to Capita. Mr Wood had been a majority shareholder (94%), and was a Director, of the Company until the end of 2010. He brought proceedings against Capita in respect of the termination of his employment, and Capita brought a counterclaim against Mr Wood pursuant to the indemnity set out in clause 7.11 of the SPA, the indemnity provided:

"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, 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." [our emphasis added]

Capita claimed that this indemnity provision was triggered as a result of the following circumstances. From 2008 the Company started to sell motor insurance via online aggregator sites such as Confused.com. Potential customers would receive a quotation via this platform, but to complete the purchase of the insurance policy they would have to speak the Company by telephone. Shortly after Capita purchased the Company's shares, the Company's employees raised concerns that customers had paid substantially more than they had been quoted online; the Company's arrangement fee had been increased despite the underwriting premium and risk profile not significantly changing. The Company carried out a review of sales between 2009 and 2011, and concluded that in many cases the Company's telephone operators had misled the customers into thinking the underwriting premium had increased, or that their risk profile was worse than it was, or had pressurised the customer into the sale.

The Company and Capita were obliged to inform the FSA (as it then was) of these findings, and accordingly did so on 16 December 2011. The FSA considered there the customers had been treated unfairly and to their detriment, and in November 2012 Capita, the Company and the FSA agreed to conduct a remediation scheme to pay compensation to customers who were identified as potentially affected by the Company's mis-selling. Capita's claim against Mr Wood was for approximately £2.4m.

Mr Wood argued that the indemnity was not triggered because the customers had not made any claims or complaints to the FSA. The FSA had only become involved, and required compensation be paid, following receipt of information from the internal review conducted by the Company and Capita.

Decisions of the lower courts

On 14 October 2014 Popplewell J held that the indemnity clause required Mr Wood to indemnify Capita even if there had been no claim or complaint by a customer to the FSA. On 30 July 2015 the Court of Appeal disagreed. Capita appealed on the basis that the indemnity should not be confined to a loss arising out of a claim or complaint.

The Supreme Court's decision

The Supreme Court considered that the indemnity was not precise and was opaque. Looking at the language of the indemnity, the Supreme Court agreed with the Court of Appeal's view of the meaning of the clause. This position was further supported by looking at the contractual context, and the wider factual matrix.

The Supreme Court considered that the parties were commercially sophisticated. It reiterated that the negotiations which lead to the contract are not relevant (Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101), but the Court can consider the business common sense of clauses being included in the contract. Further, the warranties within the SPA were critical to the contractual context of the indemnity clause. It made good business sense for the warranties to be limited by time (2 years from the date of the SPA) and quantum. The warranties could therefore afford to be wider than that the indemnity, which was not time sensitive or limited by quantum. The warranties covered the current circumstances, and therefore Capita could (and should) have brought a claim against Mr Wood for breach of warranty within 2 years of the SPA rather than pursuant to the indemnity clause.

The Supreme Court noted that Capita made various arguments in respect of tautology ("claims" being used more than once), the use of commas, and adjectival participles, within the clause. However, it considered that these provided little assistance when construing an admittedly opaque clause, especially as there are no set rules in respect of contractual interpretation on these points.

It was also noted by the Supreme Court that on its reading of the indemnity clause, if a whistleblower had referred a matter to the regulatory authorities that this would not be covered by the indemnity. However, it reiterated that in the context of the overall contract, which included agreed wide reaching warranties (although subject to the time and quantum limits) and which would cover the whistleblower scenario (again subject to time and quantum limits), it was not contrary to business common sense for the indemnity clause to be confined to claims or complaints to the regulatory bodies but not limited time or quantum.

Summary

The Supreme Court initially looked at the basic reading of the indemnity clause, it then considered the contractual context (warranties etc) and the wider factual matrix (commercially sophisticated parties and the business common sense) before returning to a more in depth review of the construction and language of the clause. In this case, the Court came to the same conclusions when looking at the both text and context of the clause. However, it is clear this may not be the case in all disputes – and the extent to which each tool (text or context) will be used to assist the court will vary according the given circumstances. The Supreme Court confirmed this case does not change the recent history of the common law of contractual interpretation but it is a helpful example of the principles in action.

The Supreme Court Offers Useful Guidance On How Best To Interpret Contracts

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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