The interpretation of contractual terms: no longer Confused.com?
Wood v Capita [29.03.17]
The Supreme Court recently handed down a decision confirming the courts’ approach to contractual interpretation.
The decision is a reminder to ensure that key terms of contracts are:
- As clear as possible
- Carefully considered in the context of other contract terms.
Although the decision relates to a share purchase agreement, it has general application to all types of contracts. This includes insurance policies — and, in particular — when regard can be had to the “factual matrix” surrounding contracts.
It affirms the general principle that:
- Where policy terms are unambiguous, they will be given their plain and ordinary meaning; but
- When choosing between ambiguous interpretations, the intentions of the parties and other extraneous factors will be taken into consideration.
Sureterm Direct Ltd sold motor insurance via websites such as Confused.com. Sureterm sold their shares to Capita Insurance Services Ltd in April 2010 via a Share Purchase Agreement (SPA).
A dispute arose as to whether Capita could rely on an indemnity clause in the SPA to claim the cost of a Financial Services Authority (FSA) imposed circa £2.5 million remediation scheme from Sureterm’s former owner — Mr Wood — following the discovery of numerous mis-sold insurance policies.
The indemnity clause obliged Mr Wood to indemnify Capita for “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”.
Relevantly the SPA also contained warranties, under which Mr Wood specifically confirmed that he was not aware of any circumstances which were likely to give rise to any FSA investigation or regulatory issues.
Mr Wood’s liability under the warranties was limited to two years after completion, whereas his liability under the indemnity clause was not time limited.
The courts’ decisions
Mr Wood said that the remediation scheme fell outside of the indemnity clause. He stated that the requirement to compensate customers arose from an internal audit — rather than from a claim by customers — or a complaint by the customers to the FSA.
Further, he said any claim by Capita should have been brought pursuant to the warranties, and they had failed to do so within the two-year period specified.
Capita’s position was that the wording of the contractual indemnity was not limited to loss arising out of a claim or complaint — and was not time limited — so they were entitled to rely on it.
The judge at first instance concluded that Mr Wood was obliged to indemnify Capita even though there had been no claim or complaint by a customer. The Court of Appeal disagreed with this decision. It said that liability could not arise unless a claim was made against Sureterm or a complaint was registered with the FSA by its customers.
The Supreme Court agreed. In considering the scope and meaning of the indemnity clause, they said it is necessary to consider the context of the contract as a whole to see whether the wider factual matrix gives guidance to its meaning. The warranties were time limited and the scope of the indemnity clause — that was unlimited in time — should be assessed in the context of those time-limited warranties.
In Wickman v Schuler , the House of Lords concluded that whilst the parties to a contract (which contains ambiguous terms) could have agreed something unreasonable or foolish, the more unreasonable the result of an interpretation, the more unlikely it is that the parties could have intended it.
This principle was affirmed in Rainy Sky SA & others v Kookmin Bank . Lord Hodge referred to this case in Wood v Capita, in concluding that, “where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions, the court must consider the quality of drafting of the clause”.
He said it was not contrary to business common sense for Sureterm and Capita to have agreed wide-ranging time-limited indemnities, and to then agree a further indemnity which is not time limited, but which is triggered only in certain circumstances.
These cases remind us of the importance of ensuring that the terms of contracts — including insurance policies — should be clear and consistent, as they could be considered in a wider context if there is any ambiguity. For example, if an insurance policy contains an obligation on an insured to notify claims only over a certain financial threshold, it could be argued that such a threshold impacts any policy provisions concerning disclosure of material facts.
Each policy provision should therefore be clear. Where there is a risk of ambiguity, clarification wording should always be included.
Read other items in Professions and Financial Lines Brief - May 2017