Drafting and interpretation of indemnity clauses

It is an old legal adage that the courts will not rescue a party from a bad bargain. The courts do have the ability to interpret agreements in a…

It is an old legal adage that the courts will not rescue a party from a bad bargain. The courts do have the ability to interpret an agreement in a different way than is actually written in order to give it commercial sense, to imply a term into it or to rectify it, but it is not the function of a court to relieve a party from the consequences of his imprudence or poor advice. 

The Court of Appeal was recently asked to consider the true and proper construction of an indemnity clause in an agreement for the sale and purchase of the entire issued share capital of an insurance broker. The case of Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd involved a dispute in the interpretation of an indemnity that was contained in the agreement. 

Under the relevant disputed provision, the sellers had 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 [Sureterm] following and arising out of claims or complaints registered with the [Financial Services Authority, the Financial Services Ombudsman or any other regulator] against [Sureterm], the Sellers or any Relevant Person … pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product or service” in the period prior to the date of acquisition. 

Shortly after completion of the acquisition, several employees of Sureterm raised concerns about its sales processes and potential mis-selling. As a result, Sureterm undertook a review of its past sales and, as it was obliged to do, reported its findings to the Financial Services Authority (FSA), forerunner to the Financial Conduct Authority. Based upon the reported findings, the FSA concluded that Sureterm’s customers had been misled and treated unfairly, and that redress was therefore due. Sureterm and the buyer agreed with the FSA to undertake a customer remediation exercise in relation to those customers affected by the mis-selling, which included paying compensation to customers of approximately £1.35 million in aggregate. The buyer then sought to recover this amount from Mr Wood (one of the sellers) under the indemnity, together with all costs and expenses incurred in relation to the remediation exercise undertaken. 

Mr Wood disputed the buyer’s claim and argued that no liability could arise under the indemnity in circumstances where the obligation to pay compensation resulted from Sureterm self-reporting potential mis-selling to the FSA, rather than as a consequence of a customer making any actual claim or registering a complaint with the FSA or other relevant authority. 

The Court of Appeal unanimously agreed with Mr Wood’s interpretation and construction of the indemnity clause and found that, properly construed, the indemnity was limited to loss caused by mis-selling where such loss followed or arose from a customer complaint or a complaint registered with the FSA or other relevant authority. The fact that interpretation made the deal a poor one for the buyer could not dictate the court’s construction of the indemnity. 

In arriving at its decision, the court was guided by the Supreme Court’s approach in Arnold v Britton [2015] UKSC 36 on the limitations of the principle of business common sense when interpreting language that is capable of more than one meaning. Christopher Clarke LJ emphasised that it is not for the courts to improve a party’s bad bargain or to make it more reasonable by a process of interpretation which amounts to rewriting the agreement, and that business common sense should not be applied to undermine the importance of the natural language used. 

It was noted that the buyer had the benefit of other forms of redress for mis-selling under the agreement, including the benefit of certain warranties relating to the conduct of Sureterm’s business prior to completion of the acquisition which were likely to have been breached by any mis-selling. 

Indemnities generally represent the strongest form of post-deal buyer protection against known risks and can prove costly to sellers as a result. This may make them more susceptible to dispute. This case highlights the importance of careful drafting and construction of indemnity provisions. The clearer the language used, the less room there will be for differing interpretations to be applied. 

If you are interested in finding out more about this case or have any questions on corporate law, then please contact Cath Hendy, an Associate in the Corporate department on 0161 214 0580 or via email to catherine.hendy@weightmans.com 

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