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Wood v Capita Insurance Services Ltd  UKSC 24
In September 2015, we wrote an article on the Court of Appeal’s decision in Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd  EWCA Civ 839. To recap, the appellant (“Capita”) purchased the entire issued share capital of Sureterm Direct Ltd (“Sureterm”) from the respondent (“Wood”) and others (together, the “Sellers”). Sureterm was a specialist insurance broker, primarily operating in the classic cars market. In the sale and purchase agreement (“SPA”), the Sellers indemnified Capita 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 [Sureterm] following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against [Sureterm], 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 SPA also contained various warranties relating to Sureterm’s compliance with regulatory obligations. However, Capita had a period of two years from completion to bring a claim under the warranties, but had not done so.
Shortly after completion, some of Sureterm’s employees raised concerns about the company’s sales processes. In particular, it transpired that after customers had received quotes on comparison sites, the company was increasing its own arrangement fees when neither the underwriting premium nor the risk profile had changed significantly. An internal review carried out by Sureterm revealed that telephone operators had misled customers and, to comply with regulatory obligations, the company informed the then Financial Services Authority (“FSA”). The FSA, Capita and Sureterm agreed to conduct a remediation scheme to compensate the customers who were affected by the mis-selling. Capita brought a claim under the indemnity against the Sellers for around £2.4 million, which included the compensation, interest and costs of the remediation scheme.
The Court of Appeal, overturning the High Court, decided that the indemnity did not cover Capita’s losses as they did not result from “claims or complaints registered with the FSA […]”. Rather, the losses resulted from information which Sureterm and Capita had provided to the FSA following the internal review. The Court of Appeal also placed emphasis on the fact that Capita had other remedies available to it under the SPA for the mis-selling (in the form of a warranty claim) and on the structure of the drafting of the indemnity.
The Supreme Court dismissed Capita’s appeal, upholding the Court of Appeal decision. The Court commented that “textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation”; both can be used as “tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement”. The Court agreed that the structure of the clause suggested that the indemnity was only intended to cover losses resulting from “claims or complaints registered with the FSA […]”. Most significantly to Lord Hodge (who gave the lead judgement), the wording “following and arising out of claims or complaints registered with the FSA […]” would serve no purpose by restricting the source of loss and damage if it only applied to “all fines, compensation or remedial action [...]” and did not also operate to restrict the wording at the beginning of the clause (“all actions, proceedings, losses, claims, damages […]”). After analysing the drafting, in line with the approach discussed earlier in the judgement, the court turned to the commercial context and practical consequences of the rival interpretations. Lord Hodge commented, at paragraph 40 of the judgement, that:
“the general purpose of clause 7.11 to indemnify Capita and its group against losses occasioned by mis-selling is clear. Had clause 7.11 stood on its own, the requirement of a claim or complaint by a customer and the exclusion of loss caused by regulatory action which was otherwise unprompted might have appeared anomalous”.
However, the Sellers had also given Capita wide-ranging warranties, which probably covered the relevant loss. Capita had two years to bring a warranty claim, which was not an unreasonable time period to examine Sureterm’s sales practices and uncover any regulatory breaches (Capita had sent the findings of its internal review to the FSA within 20 months). On this basis, it was not the Court’s job to improve Capita’s bargain just because it had failed to bring a warranty claim within the requisite time period.
The case highlights the considerable leeway available to the Court in interpreting a commercial contract. It’s clear that the textualist and contextualist approaches seen in recent cases are not to be viewed as mutually exclusive, but rather as tools to be chosen by the Court depending on the circumstances of the case. In this case, although the court placed much emphasis on the drafting of the indemnity, significant weight was also given to the fact that Capita would have also had a warranty claim had they brought it on time. Lord Hodge’s comment at paragraph 40 (excerpted above) suggests that the Court’s decision might have been different had this not been the case. As always, the decision is a reminder that indemnities will often be narrowly construed and should be considered carefully by lawyers, both in relation to the wording of the clause and in the wider context of the agreement as a whole.