The Supreme Court dismissed Capita’s appeal about an indemnity in a share sale agreement. It held that the sellers’ promise to cover losses from pre-completion mis-selling of insurance was triggered only by a claim against the company, a seller or a relevant person, or by a complaint registered with a regulator against one of them. A report by the company itself to the Financial Services Authority, followed by a required compensation scheme, was not enough.
The sale and Capita’s counterclaim
On 13 April 2010 Capita Insurance Services Ltd bought the entire share capital of Sureterm Direct Ltd, a specialist insurance broker, under a detailed and professionally drafted sale and purchase agreement. Andrew Wood owned 94 per cent of the shares and was managing director. Two other directors owned the rest. Mr Wood remained managing director until the end of 2010. He later sued Capita over the ending of his employment. Capita counterclaimed under an indemnity in clause 7.11. Only that counterclaim was before the Supreme Court. The other sellers were no longer parties.
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From about August 2008 the company sold motor insurance through online aggregator sites. Customers obtained a quotation online and were then contacted by telephone. After the purchase, employees raised concerns that some customers had paid substantially more than the online quotation, with arrangement fees increased although the underwriting premium and risk profile had not changed significantly. A review of sales from January 2009 to January 2011 found that operators had in many cases misled customers about why a premium was higher or had pressured them to buy.
Capita and the company reported the findings to the Financial Services Authority on 16 December 2011. The FSA said that customers had been treated unfairly and had suffered detriment, and that there would have to be redress. After a later risk-assessment visit, Capita and the company agreed to run a remediation scheme. Capita claimed a sum made up of estimated compensation of £1.35 million, interest of about £400,000 and the costs of the scheme. It alleged loss from mis-selling or suspected mis-selling before completion.
Some of those allegations, including the extent of the mis-selling and any customer detriment, were disputed. Apart perhaps from the undisputed description of the online sales process, they were not facts by which the agreement was to be construed. What mattered was that, on Capita’s own account, compensation had not been required because a customer had made a claim or had complained to the FSA or another authority. It followed the company’s report of its internal review and the FSA’s requirement that customers be compensated. Mr Wood said that those circumstances fell outside the indemnity.
The clause and the decisions below
Clause 7.11 required the sellers to pay the buyer an amount equal to what was needed to indemnify the buyer and its group against losses, claims, costs, expenses and liabilities suffered or incurred, and fines, compensation or remedial payments imposed on or required of 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, relating to the period before completion and pertaining to mis-selling or suspected mis-selling of insurance or an insurance-related product or service. A relevant person included an employee or former employee and a dependant.
The indemnity was additional to lengthy warranties. Those warranties included statements that the sellers were not aware of circumstances likely to lead to an investigation, that no relevant breach had been committed, and that the business had been conducted in accordance with applicable financial services laws. Warranty claims, other than certain tax claims, had to be notified within two years of completion. Liability under the indemnity was not limited in time. A separate cap limited aggregate liability, including under the indemnity, to the purchase price, and each seller’s liability to his proportionate share.
On a preliminary issue, Popplewell J held that the indemnity required Mr Wood to indemnify Capita even if no customer had made a claim or complaint. The Court of Appeal disagreed. Christopher Clarke LJ gave the judgment, with which Patten and Gloster LJJ agreed. The Court of Appeal declared that liability could not arise unless the matter followed and arose out of either a claim against the company, a seller or a relevant person, or a complaint registered with the FSA, the Ombudsman or another authority against one of those persons, and in either case related to the pre-completion period and to mis-selling or suspected mis-selling. Capita appealed, arguing that the indemnity was not confined to loss arising out of a claim or complaint.
Contractual interpretation
Lord Hodge, with whom Lord Neuberger, Lord Mance, Lord Clarke and Lord Sumption agreed, rejected an argument that Arnold v Britton had altered the guidance in Rainy Sky. He did not reformulate that guidance. The task is to ascertain the objective meaning of the language chosen by the parties. It is not a literalist exercise. The contract must be read as a whole, and the weight given to the wider context depends on its nature, formality and quality of drafting. Where there are rival meanings, the court may consider which is more consistent with business common sense, while remembering the quality of the drafting and the possibility that a party agreed to something which, with hindsight, did not serve its interest, or that a provision was a negotiated compromise.
The exercise is iterative: each suggested interpretation is checked against the contract and its commercial consequences. It does not matter whether the analysis starts with the factual background or with the words, provided the indications from each are balanced. Textual and contextual analysis are tools, not conflicting theories. A sophisticated contract prepared by professionals may still lack clarity because of conflicting aims, poor communication, different drafting practices or deadlines. In such a case the factual matrix and the purpose of similar provisions may help.
Why the narrower reading was preferred
Lord Hodge’s first reading matched the Court of Appeal: the indemnity covered loss which followed and arose out of claims or complaints against the company, the sellers or a relevant person, related to the period before completion, and pertained to mis-selling or suspected mis-selling. The contractual context confirmed that reading. The same mis-selling was probably covered by the regulatory warranties, but a warranty claim had to be made within two years. The unlimited indemnity had to be read beside those time-limited warranties.
The parties were commercially sophisticated and knew the insurance broking industry. The sellers were the directors and only shareholders, and knew or ought to have known how the business had been operated. Capita had not managed the company before the purchase. That lack of knowledge explained the disclosure letter and the warranties, but it did not fix the scope of the indemnity. The negotiations were irrelevant to interpretation. Business common sense suggested that Capita wanted the broadest indemnity it could obtain, while the sellers, already exposed under the warranties for two years, had an interest in limiting later exposure. It could show the purpose of a provision, but it could rarely show where a negotiated compromise had been struck.
Dividing the clause into parts, Capita said that only fines, compensation and remedial payments had to follow a claim or complaint, while the wider list of losses was covered whenever it related to pre-completion mis-selling. Mr Wood said that both categories required either a claim or a complaint registered with a regulator, in each case against the company, a seller or a relevant person, together with the two further conditions of timing and subject matter. Both sides accepted that the wider list was broad enough to include the fines and compensation, so one or other part of the clause appeared surplus.
Lord Hodge found Capita’s surplus-wording argument unlikely. If the reference to claims and complaints limited only the fines and compensation, it would not limit the indemnity at all. On Mr Wood’s reading, those words limited both categories and therefore had a purpose. Capita’s reading would also leave the clause silent as to the persons against whom the claims had to be brought. There had to be some limit, since it would be absurd for Capita to claim for its own pre-completion mis-selling, but it was far from obvious that the class would be the company, the sellers or a relevant person.
Capita’s smaller textual points did not prevail. Any tautology between claims in the list of losses and claims in the trigger was unsurprising in a commercially drafted list of that breadth. The presence or absence of commas was not a strong pointer, because the clause used commas erratically and there are no fixed rules for their use. A change from a participle to a relative pronoun did not tie the claims-and-complaints words exclusively to the fines and compensation. Points of style and syntax gave little help with an admittedly opaque clause.
The practical difference was real. On Mr Wood’s reading, neither a whistle-blower nor a report by management complying with its regulatory duties would trigger the indemnity, even though pre-completion mis-selling caused loss. Had the clause stood alone, excluding loss caused by regulatory action prompted in that way might have looked anomalous. It did not stand alone. Capita had two years under the warranties to examine sales practices and uncover regulatory breaches. That was not, on its face, an unreasonable period, and Capita had in fact sent its findings to the FSA within 20 months of completion. Wide warranties subject to a time limit, plus a further indemnity unlimited in time but available only in limited circumstances, were not contrary to business common sense. If the agreement had become a poor bargain because no warranty claim was notified in time, it was not the court’s function to improve it.
Lord Hodge therefore concluded that the trigger was to be found principally in a careful examination of the language. His reasons were essentially those of Christopher Clarke LJ, and the Court of Appeal’s view of the difficult clause was correct.
Verdict: The Court unanimously dismissed Capita’s appeal. Under clause 7.11, the indemnity required the specified claim or complaint. The company’s own referral of potential mis-selling to the regulator did not trigger it. The Court made no finding on the extent of the underlying mis-selling.
Source: Wood v Capita Insurance Services Limited [2017] UKSC 24
