Wood v Capita Insurance Services Ltd (2017)


The court interpreted an indemnity clause in an agreement for the sale and purchase of shares in an insurance broking company. The clause covered loss caused by mis-selling only where such loss followed or arose from a claim or complaint by a customer to the Financial Services Authority or other regulator. The indemnity did not apply where the company referred itself to the FSA.


The seller of an insurance broking company appealed against a decision concerning the interpretation of an indemnity clause in an agreement for the sale of the company to the respondent buyer.

The parties had entered into a written agreement for the sale of the company. Under an indemnity clause, the seller agreed to indemnify the buyer in respect of "...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 [Financial Services Authority or other regulator]... pertaining to any mis-selling or suspected mis-selling..." in the period before the sale. Shortly after the purchase, company employees alleged that the company had mis-sold products to customers. The buyer informed the Financial Services Authority, which directed it to pay compensation to affected customers. The buyer sought to rely on the indemnity clause to recover its losses. The Court of Appeal held that the indemnity was confined to loss arising from a claim or complaint. It determined that the indemnity did not apply to the buyer's losses because they arose from the company's referral of itself to the FSA, and not as a result of any customer making a claim or registering a complaint with the FSA or any other regulator.

The buyer submitted that the Court of Appeal had placed too much emphasis on the words of the agreement and given insufficient weight to the factual matrix, having been wrongly influenced by the seller's argument that the decision in Arnold v Britton [2015] UKSC 36 had "rowed back" from the guidance on contractual interpretation given in Rainy Sky SA v Kookmin Bank [2011] UKSC 50. It argued that the indemnity applied because the words "following and arising out of claims or complaints registered with the FSA" applied only to fines, compensation, remedial action or payments.


Contractual interpretation - Arnold had not altered the guidance given in Rainy Sky and the two cases were saying the same thing about the approach to contractual interpretation. The court's task was to ascertain the objective meaning of the language with which the parties had expressed their agreement. That was not a literalist exercise focused solely on a parsing of the wording of the particular clause. Instead, the court had to consider the contract as a whole and, depending on its nature, formality and quality of drafting, give more or less weight to elements of the wider context. Where there were rival meanings, the court could reach a view about which construction was more consistent with business common sense. However, in striking a balance between the indications given by the language and the implications of the competing constructions, the court had to consider the quality of drafting of the clause. It also had to be alive to the possibility that one side might have agreed to something which, with hindsight, did not serve his interest. Similarly, a provision might be a negotiated compromise and negotiators might not have been able to agree more precise terms. Interpreting the terms of a contract involved an iterative process by which each suggested interpretation was checked against the provisions of the contract and its commercial consequences investigated. It did not matter whether the more detailed analysis commenced with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balanced the indications given by each. Some agreements might be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they had been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts might be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance, Rainy Sky and Arnold applied (see paras 8-14 of judgment).

Interpretation of the indemnity clause - In the instant case, the Court of Appeal's interpretation had been correct. The contractual context was significant. If it was only fines, compensation or remedial action or payments imposed on the company which had to arise out of complaints made to the FSA against the company, that would mean that the clause did not specify against whom the actions, proceedings and claims referred to in the indemnity clause could be made so as to trigger the indemnity. However, it would be absurd if there was no limit on who such persons could be. Further, the indemnity was in addition to detailed warranties elsewhere in the contract in relation to mis-selling. Those warranties were time-limited, whereas the indemnity was unlimited in time. One might readily infer that the sellers had an interest in minimising their further exposure to liability after their exposure under the warranties had elapsed. If the indemnity clause had stood on its own, the requirement of a claim by a customer and the exclusion of loss caused by regulatory action which was otherwise prompted might have appeared anomalous, but the indemnity clause was in addition to the wide-ranging warranties elsewhere in the contract. That was not contrary to business common sense. The agreement might have become a poor bargain for the buyer, but it was not the court's function to improve that bargain (paras 25, 27-28, 33-35, 40-41).

Appeal dismissed