Wood v Sureterm Direct Ltd: business sense in contractual interpretation revisited

Background

In Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd, the Court of Appeal was asked to consider the true meaning of an indemnity in a share purchase agreement. This case follows hotly on the heels of Arnold v Britton, in which the Supreme Court emphasised that the natural meaning of a contract should not be diminished simply because it represents a bad bargain for one of the parties. Wood builds on this principle and provides further guidance on the use of business common sense as an aid to contractual interpretation.

Facts

Wood entered into a share purchase agreement with Capita for the acquisition of the entire issued share capital of Sureterm, a car insurance broker. Following conclusion of the deal, Sureterm’s employees raised concerns about potential mis-selling of products to customers in the period prior to the acquisition. Sureterm conducted a review and reporting its findings to the FSA. The FSA concluded that customers had been misled and Sureterm paid £1.35 million in customer compensation. Capita sought to rely on the following indemnity in the share purchase agreement in order to recover this sum from Wood:

“The Sellers undertake to… indemnify the Buyer… 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 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 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”.

Wood argued that Capita could not rely on the indemnity because it only covered losses which were a result of a “claim or complaint” registered with the FSA. As Sureterm had self-referred to the FSA, the indemnity was not engaged. Capita argued that the indemnity set out two categories of losses: “damages, costs, charges…” on the one hand and “fines, compensation, remedial actions, etc.” on the other. According to Capita, only the second category of loss was qualified by the need for the claim to have been registered with the FSA.

Decision

The Court of Appeal unanimously overturned the decision of the High Court and found in favour of Wood. The Court agreed that the indemnity set out two categories of loss, but held that both categories must arise out of a claim or complaint registered with the FSA. Therefore, as Sureterm had self-referred, it could not invoke the indemnity.

The Court dismissed the High Court’s conclusion that Wood’s interpretation of the indemnity lacked any good commercial reason. The Court emphasised that the natural meaning of the words used in a contract should not be departed from unless there is some ambiguity as to their meaning. A clause which could be interpreted as lacking business common sense might have been included by the parties as a compromise position. Further, businessmen are known to make bad bargains owing to a weak negotiating position or poor drafting skills and it is not the courts’ role to improve poor business decisions.

The Court said that a balance should be struck between the natural meaning of the language used in a contract and the implications of any rival constructions. If the language is clear, the less appropriate it is for the court to intervene by considering the business reasoning of the parties, even if the wording results in a bad bargain for one of the parties. However, if the language used is ambiguous and could be construed so as to avoid an interpretation lacking in business common sense, the courts may be more inclined to consider both options.

Comment

Although this is an English decision and not legally binding in Scotland, it reiterates the principles which underpin contractual interpretation in both jurisdictions. Building on the recent decision in Arnold, Wood makes it clear that the courts will not re-write a contractual provision in order to save one party from a bad bargain or the consequences of poor advice. This case highlights the importance of clear and accurate drafting, with consideration being given to both language and structure, particularly in indemnity clauses which often provide the strongest protection to a party to a commercial contract.