Capita Insurance Services Ltd entered into a share purchase agreement (SPA) to purchase the entire issued share capital of the ironically named Sureterm Direct Limited, a company which specialised in the sale of motor insurance for classic cars. Mr Wood was the managing director and majority shareholder of Sureterm.
An indemnity was included in the SPA, under which the sellers agreed to indemnify Capita 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 Sureterm following and arising out of claims or complaints registered with the Financial Services Authority or other regulator against Sureterm 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 completing the acquisition, concerns were raised at Sureterm regarding the sales processes. Capita acted on this and self-reported the findings of an internal investigation to the Financial Services Authority (FSA). The FSA found that Sureterm had treated its customers unfairly, and Capita and Sureterm agreed with the FSA to conduct a remediation scheme to compensate the customers. Capita subsequently sought to recoup its costs of around £2,500,000 from Mr Wood under the indemnity. Mr Wood disputed Capita’s claim on the grounds that the wording of the indemnity stipulated it would only be triggered if a "claim or complaint" arose as a result of mis-selling. However, this had not happened as Sureterm had self-reported the mis-selling, and subsequently the indemnity had not been triggered.
The High Court found that Mr Wood was required to indemnify Capita for the loss, despite the FSA remediation scheme arising from self-reporting rather than a claim or complaint. The Court of Appeal reversed this decision, finding that as there was neither a claim nor complaint made to the FSA, a claim could not be brought under the indemnity. Capita appealed the decision to the Supreme Court.
Supreme Court’s approach
Capita's grounds for appeal to the Supreme Court were based on the guidance on contractual interpretation given in Rainy Sky SA v Kookmin Bank [2011]. The guidance provided that the ultimate aim when interpreting a commercial contract is to determine what the parties meant by the language used, in the business context in which it was used. Capita argued that the Court of Appeal had failed to consider the business context and had given a disproportionate weighting to the text of the contract.
The Supreme Court ultimately dismissed Capita’s appeal, on the basis that the indemnity was not triggered when Sureterm self-reported to the FSA. The Supreme Court found that the approach adopted in Rainy Sky was not one based purely on business context and that the Capita interpretation had wrongly placed too much emphasis on context.
Lessons to be learned
Lord Hodge, Justice of the Supreme Court, made it clear that the language of a clause and the context of the wider business environment are not conflicting paradigms; when interpreting a contractual clause, the court should use both approaches, but depending on the nature of the contract, one approach may be used to a greater extent than the other. The court will firstly consider the language used, and if the language appears opaque, the court will then look at the wider business context. However, while the business context of an indemnity clause will be examined, the court will also be aware that one side may have simply struck a bad bargain.
In the Sureterm SPA, the warranties provided protection from mis-selling, but a claim had to be brought within two years, which it had not been. Capita consequently had to rely on the more imprecisely drafted indemnity, which had no such time limit. Capita argued that the parties’ intentions should be considered in interpreting the indemnity, and that the indemnity should be interpreted in line with the warranties. The Court found that Capita would probably have been successful in a claim under the indemnity if it had been drafted more precisely and in line with the warranties. However, it had not been, and while the indemnity might be a bad business deal for Capita, it is the court’s function to analyse the parties’ intentions, and not to improve one side’s bad bargain.
There are several useful lessons to be taken from this case for buyers, specifically:
- the drafting in sale agreements should always be clear and accurate to demonstrate the parties’ intentions;
- parties should be aware that the more complex a contract, the more emphasis there is likely to be on contextual interpretation;
- when drafting an indemnity, the wider context of the SPA and the business environment should be considered, and indemnities should be drafted to work more fluidly with warranties, to reflect the parties’ business intentions; and
- buyers should consider conducting due diligence on newly acquired companies, to ensure that any issues are identified early on, so that any claim can be brought within the time limits set out in the SPA.
For further information on this matter or advice on drafting a commercial contract, please contact John Richardson (jrichardson@thrings.com) on 0117 930 9522.
