Inserting a suitable indemnity in a share purchase agreement remains the go-to remedy for buyers who discover the possibility of a claim during their due diligence process but still wish to continue with the deal.  If the sellers indemnify the buyer for loss suffered as a result of the identified (but possibly unquantifiable) matter, they effectively underwrite the risk of it happening and make the buyer whole for the full extent of its loss.  The recent High Court case of Wood v Suretem Direct Limited and Another [2014] EWHC 3240 is a good lesson for those involved with the drafting of acquisition indemnities to ensure the wording and grammatical construction is clear, as something as small as a comma can cause wording to be read in very different ways.

The Suretem case involved an indemnity given by the sellers of Suretem Direct Limited to the buyer, Capita Insurance Services Limited, which sought to indemnity the buyer in the event of losses suffered as a result of any mis-selling or suspected mis-selling of insurance products.  The actual wording was one long continuous sentence which covered:

(1)          “all losses, claims…and liabilities suffered or incurred, and”

(2)          “all fines…or payments imposed on or required to be made by the Company”

(A)          “following and arising out of claims…registered with the FSA [sic], the Financial Services Ombudsmen or any other Authority against the Company…, and”

(B)          “which relate to the period prior to the Completion Date pertaining to any mis-selling…”

(as separated out by Mr Justice Popperwell in his judgement).

Following completion, instances of mis-selling which dated back to before Capita Insurance Services acquired the company were discovered, but no claim had been registered.  The case therefore turned on a question of whether to interpret the indemnity narrowly or broadly.  If part (A) applied to both statements (1) and (2), the indemnity could not be triggered if a claim had not been registered, and so the indemnity could not be enforced by the buyer.  On the other hand, if part (A) only qualified statement (2), the buyer could enforce the indemnity despite no third parties having lodged claims with the authorities.

The court preferred the broader interpretation, allowing recovery by the buyer.  Partly, this was due to the language used: the court was persuaded by the fact that the losses specified in statement (2) clearly related to the type of regulatory context provided by part (A) but there was no similar link between statement (1) and part (A).  Secondly, it was held that the perceived commercial purpose of the indemnity was to provide restitution to the buyer and so to limit the indemnity just to registered claims would be perverse.  Finally, the decision swung on that all-important comma: by including a comma in statement (1) but not statement (2), the court was convinced that the intention was to link statement (2) and part (A) together and to act as a separation of statement (1) and part (A).

 

For more information, please contact Andy Moseby.

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