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The Supreme Court has reviewed the principles of contractual interpretation in a recent case arising from a share purchase agreement.
Under the agreement, Capita Insurance Services Limited bought an insurance broker, Sureterm Direct Limited, from Mr Andrew Wood and others.
Shortly after completion, Sureterm found that some of its customers had paid substantially more for their insurance than they had originally been quoted. It reported itself to the Financial Services Authority, which found that the customers would have to be compensated.
Capita claimed the cost of compensation from Mr Wood under an indemnity in the share purchase agreement, which read as follows:
‘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.’
The High Court found for Capita, but its judgment was reversed by the Court of Appeal, and the Supreme Court agreed, finding for Mr Wood.
Describing the clause as ‘opaque’, Lord Hodge held that, to be covered by the indemnity, any loss had to arise out of a claim or complaint registered with the FSA. If the reference to claims or complaints registered with the FSA applied only to fines, compensation and remedial action or payments, as Capita had argued, it would serve no purpose, since fines, compensation and remedial action or payments were already included in the broader description of losses earlier in the clause. Sureterm’s losses were not covered by the indemnity, since it had reported itself to the FSA; no claims or complaints were made against it.
Lord Hodge also considered the broader context of the clause. The agreement included warranties, which were drafted more widely than the indemnity but were time-limited; any claim under warranty had to be made within two years. In that context, it made sense to construe the indemnity narrowly.
Explaining his approach, Lord Hodge described contractual interpretation as ‘a unitary exercise’ in which both business common sense and the drafting of the clause in question should be considered; ‘each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated’.
This case illustrates the difficulties that arise from poor drafting: in negotiating agreements, the parties should ensure, as far as possible, that the wording agreed reflects their intended meaning clearly.