Corporate and M&A

Interpreting Contracts - Indemnity Clauses in Share Sale Agreements: Implications of Wood v Capita Insurance Services Limited 

In 2010, Capita Insurance Services Limited (Capita) purchased the share capital of Sureterm Direct Limited (Sureterm) which carried on a business selling insurance for classic cars. After completion, a number of employees raised concerns about Sureterm’s sales processes. Sureterm responded by carrying out a review of its sales between January 2009 and January 2011. This review revealed that in many cases Sureterm’s telephone operators had misled customers into believing that an underwriter had required a higher premium or that their risk profile was worse than it was or had pressurised the customer to make sure that a sale was made. 

Capita and Sureterm were obliged to inform the Financial Services Authority (FSA) of the findings and did so on 16 December 2011. The FSA informed them that the customers had been treated unfairly and had suffered detriment and that there would have to be redress. Capita and the Company agreed with the FSA to conduct a remediation scheme to pay compensation to customers who were identified as potentially affected by the Company’s mis-selling. 

Capita alleges that it, the Company and Capita’s other subsidiaries have suffered loss as a result of the mis-selling or suspected mis-selling of insurance products in the period before the completion of the sale. Capita’s claim is for £2,432.883.10, comprising an estimate of the compensation at £1.35m, interest of about £400,000 and the costs of the remediation scheme 

The sale and purchase agreement (SPA) contained a warranty by the Sellers that Sureterm had not engaged in mis-selling of insurance products prior to completion. Capita had two years from completion to bring a warranty claim but did not do so. Instead, Capita made a claim against the Sellers under the following indemnity in the SPA: 

“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 Sellers disputed the claim and Capita issued legal proceedings. The High Court upheld the Capita claim but, on appeal, the Court of Appeal (CA) found in favour of the Sellers. 

In essence, as there had been no claim or complaint by a customer, the CA held that the indemnity did not apply. On 29 March 2017, the Supreme Court unanimously upheld the CA decision. 

What does this mean for the interpretation of contracts? 

A court will ascertain the objective meaning of the contractual language. It will consider the contract as a whole and, depending on the nature, formality and quality of its drafting, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. Where there are rival meanings, the court can reach a view as to which construction is more consistent with business common sense. 

The court will be alive to the possibility that one side may have agreed something which in hindsight did not serve his interest, or that a provision may be a negotiated compromise. 

It is not contrary to business common sense for the parties to agree wide-ranging warranties, which are subject to a time limit, and to agree a further indemnity, which is not subject to any such limit but is triggered only in limited circumstances. 

The SPA may have become a bad bargain from Capita’s standpoint, as it appears it did not notify the Sellers of a warranty claim within two years of Completion. But it is not the function of the court to improve their bargain 

This judgment underlines the need for careful drafting of warranty and indemnity clauses and for clarity on the nature and extent of any specific liability which requires an indemnity.