When buying a company or a business, it is common for the contract to contain a number of indemnities. Indemnities are undertakings by one party to meet specific potential legal liabilities. If an indemnity is triggered, the party giving the indemnity is required to make payment to the other party, in general terms, on a pound for pound basis for loss suffered.
The UK Supreme Court recently considered the interpretation of indemnities in the case of Wood v Capita Insurance Services Limited.
The facts
The case related to the purchase of Sureterm, a specialist car insurance broker business owned by Mr Wood, by Capita Insurance Services Limited.
Under the Share Purchase Agreement, Mr Wood granted an indemnity to Capita in respect of any losses arising out of claims or complaints registered with the Financial Conduct Authority (FCA) which related to mis-selling of insurance products in the period before Capita acquired Sureterm.
Following completion of the purchase, Capita argued that it had suffered loss as a result of the mis-selling of insurance products and sought to rely on the indemnity to recover its loss from Mr Wood.
However, Mr Wood argued that the mis-selling had been self-reported by Sureterm to the FCA and, because it was not the result of a client complaint, any losses suffered by Capita fell outwith the scope of the indemnity.
The decision
The Court decided that, balancing the language of the relevant clause, the practical implications of the interpretation and the contract as a whole, it must consider the “quality” of the drafting and it was possible that one party had just simply struck a bad bargain.
In the Court’s view, it was not its function to improve one party’s position. Accordingly, the Court, agreeing with Mr Wood, found that Capita’s loss was not captured by the indemnity.
The importance of careful contract drafting
This case reinforces the importance of careful drafting, making the point that the Courts will not use their discretion to assist a party that has struck a bad bargain. It is also a useful reminder that a contract must work coherently as a whole as the Courts will interpret any contentious clauses in context of the whole agreement.
