Global menu

Our global pages

Close

Contractual interpretation and the importance of drafting in a clear, concise and unambiguous manner

  • Ireland
  • General

30-11-2017

There are few clauses in a contract which are more important to buyers and sellers than an indemnity clause.

The recent decision of the UK Supreme Court in Wood v Capita Insurance Services Limited demonstrates the importance of clear and unambiguous drafting in a contract and serves as reminder of the pitfalls of seeking to interpret a contractual clause in isolation rather than as part of the whole contract.

In short, the case centred on the interpretation of an indemnity clause in a share purchase agreement (“SPA”) in circumstances where the buyer was already contractually time-barred from bringing a warranty claim. The UK Supreme Court dismissed the appeal brought by Capita Insurance Services Limited (the “Buyer”) and held that the indemnity clause did not indemnify the Buyer for compensation paid to customers as a result of mis-selling in the years preceding the SPA.

Background

In April 2010, the Buyer purchased the entire issued share capital of Sureterm Direct Limited (the “Company”) (a car insurance broker) from Mr Andrew Wood (the “Respondent”) and some other minor shareholders.

Shortly after the acquisition, some of the Company’s employees raised concerns regarding the sales processes and potential mis-selling of products by the Company in the years prior to the completion of the SPA. The Company undertook a “past business review” and reported its findings to the Financial Services Authority (the “FSA”, as it then was)2 on 16 December 2011 (as it was required to do so). The FSA determined that the Company’s customers had been misled and it should conduct a customer remediation exercise, which it did by repaying €1.35m in customer compensation. 

The Buyer instituted proceedings against the sellers claiming that it had suffered losses as a result of the misselling of insurance products by the Company. The Buyer sought to rely upon the following indemnity in the SPA (the “Indemnity”):

“The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer … 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 … against the Company … 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 Respondent argued that the Buyer’s loss was outside the scope of the Indemnity because such loss had occurred as a result of the Company’s self-reporting of the mis-selling to the FSA rather than as a result of a “claim or complaint” being brought by the Company’s customers (for example).

The decision

The Supreme Court unanimously agreed with the Court of Appeal’s decision that recoverable losses under the Indemnity were limited to those that arose from or followed a customer’s claim or complaint registered with the FSA in relation to mis-selling. Lord Hodge gave the leading judgmentand held that when a Court is interpreting a contractual term, its primary objective is to ascertain the objective meaning of the language in the contract. In coming to this conclusion Lord Hodge noted that:-

“… this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning.”4

The SPA also contained a detailed warranty section through which the sellers warranted inter alia that (i) they were not aware of circumstances which were likely to give rise to any investigation or enquiry by any “Authority” and (ii) that no breach of contract, tort, statutory duty or law had been committed for which the Company was or might be liable etc. The fact that, in addition to the Indemnity, the SPA contained broad warranties seemingly covering the subject matter of the mis-selling led Lord Hodge to conclude, in part, that the ambit of the Indemnity was more restrictive.

Lord Hodge reasoned that it was not contrary to common business sense for the parties to agree wideranging warranties (subject to strict time limits) and to agree a further indemnity (not subject to such strict time limit) that is only triggered in limited circumstances.

Accordingly, Lord Hodge held that the Buyer’s circumstances fell outside the scope of the Indemnity and noted that it was not the role of the courts to improve the bargain of a contractual party.

Lord Hodge stated that the SPA appeared to have become a bad bargain for the Buyer as it had not notified the sellers of a warranty claim within 2 years of completion, as required by the SPA.

Practical Implication

While, the Irish courts are not bound by decisions of the UK Supreme Court, such judgments do have persuasive value for the Irish courts, particularly when the jurisprudence in Ireland is underdeveloped.

This decision emphasises the importance of clear and unambiguous drafting, the very serious consequences of limiting recourse where this may not have been the intention and the necessity of initiating claims within the earlier of statutory or contractual limitation periods. In circumstances where parties negotiate a general warranty and a specific indemnity which both seemingly cover the same subject matter, the decision also arguably stands as an authority that the courts will not interpret an indemnity in a more restrictive way. This can be all the more relevant when in negotiating documents there can be a difficulty in agreeing drafting points and sometimes there is a commercial decision reached to agree a form or wording and reaching a that is not completely unambiguous or open to interpretation.

Additionally, it serves as a timely reminder that contractual clauses should not be interpreted in isolation, but rather, as part of the entire contract.


1. [2017] UKSE 24
2. The FSA has now become two separate regulatory authorities: (1) the Financial Conduct Authority (“FCA” ) and (2) the Prudential Regulation Authority (“PRA”)
3. Lord Neuberger, Lord Mance, Lord Clarke and Lord Sumption concurred with Lord Hodge
4. Supra note 1, at para 10 (emphasis added)

For further information, please contact:

Gerard Ryan
Partner, Head of Corporate
& Commercial
+353 1 6644202
gerardryan@eversheds-sutherland.ie

Jonathan Ennis
Solicitor
+353 1 6644934
jonathanennis@eversheds-sutherland.ie

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

< Go back

Print FriendlyTwitterLinkedInEmailShare
Register to receive regular updates via email.