The recent Supreme Court’s decision in Wood –v- Capita Insurance Services Limited serves as a further reminder on the importance of clarity in drafting contracts.
Wood –v- Capital Insurance Services Limited
Capita Insurance Services Limited (“Capita”) entered into an agreement for the sale and purchase of the entire share capital of Sureterm Direct Limited (“the Company”). The Company was involved in the sale of insurance through comparison sites such as Confused.com. It later transpired that the Company had mis-sold insurance products prior to the sale to Capita. As a result, the Company was required to pay compensation to customers who were potentially affected by the Company’s mis-selling under a Financial Services Authority remediation scheme.
The share purchase agreement included the following indemnity:
‘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 actions 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 also gave Capita a number of warranties in respect of (a) circumstances which were likely to give rise to any investigation or enquiries by any authority; (b) potential claims; (c) compliance with the Company’s regulatory obligations etc. The sellers’ liability under those warranties was time limited and capped in terms of value.
The Court ruled in the sellers’ favour. When considering the matter, the Court highlighted that textualism (considering the actual words of the contract) and contextualism (the particular circumstances and agreement as a whole) played an important role and they were not mutually exclusive. The weight to be given to each would vary depending on the particular circumstances of the case. Where an agreement has been drafted by professionals, a textual analysis may be more appropriate. On the other hand, the Court may place greater weight on contextualism for more informal agreements prepared by without professional assistance.
The Court stated that the indemnity clause was opaque but the fact that the sellers had given detailed warranties, which probably would have covered the mis-selling, was an important factor. The warranties were not unreasonable in terms of time scale nor contrary to business common sense. It is not a function of the Court to improve a bad bargain for Capita.
This decision reiterates the importance of ensuring that commercial contracts are drafted clearly. Individual clauses should be considered against the entire agreement and not in isolation.
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