Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd

Contractual interpretation is a unitary and iterative exercise. The court determines what a reasonable person, possessing the background knowledge reasonably available when the contract was made, would understand the parties to mean.

Where language permits more than one meaning, the implications of the rival constructions and business common sense are relevant. Their weight depends on the clarity of the language and the degree to which a construction produces an unreasonable result. Commercial common sense cannot justify rewriting a poor bargain.

An indemnity covering two categories of loss was qualified, for both categories, by requirements that the loss follow and arise from a specified claim or complaint, concern the pre-completion period and pertain to mis-selling or reasonably suspected mis-selling.

The sellers sold all the shares in an insurance brokerage to Capita Insurance Services Ltd under a sale and purchase agreement. Clause 7.11 required the sellers to indemnify Capita against specified losses connected with pre-completion mis-selling or suspected mis-selling.

After concerns about sales practices were reported to the Financial Services Authority, Capita and the company agreed to a customer remediation scheme. Capita counterclaimed under the indemnity for compensation, interest and the scheme's costs. No relevant customer claim or complaint was clearly alleged.

Popplewell J, in [2014] EWHC 3240 (Comm), construed the clause as permitting recovery without a claim or complaint in relation to the first category of loss. The central issue on the seller's appeal was whether the claim-or-complaint requirement qualified both categories of indemnified loss.

1. Appeal allowed. Clause 7.11 was naturally read as identifying two categories of indemnified loss and then subjecting both categories to three requirements. The losses had to follow and arise from a specified claim or complaint, relate to the period before completion and pertain to mis-selling or suspected mis-selling of an insurance or insurance-related product or service. Christopher Clarke LJ gave the judgment, with which Gloster and Patten LJJ agreed.

2. Contractual interpretation is a unitary and iterative exercise. The court determines what a reasonable person, with the background knowledge reasonably available to the parties when they contracted, would understand the language to mean. Where the wording permits more than one meaning, the court may compare the implications of the rival readings and prefer the one consistent with business common sense.

3. Commercial common sense must be used cautiously. A provision may reflect compromise, unequal bargaining power, poor drafting or an imprudent bargain. The clearer the language, the less appropriate it is to confine that language merely to avoid an unbusinesslike result. The court identifies the bargain made; it does not improve or rewrite it.

4. Read as a whole, clause 7.11 first identified two categories: broadly, actions and losses suffered or incurred; and fines, compensation or remedial payments imposed on or required from the company. The subsequent qualifying words applied to both. This construction also gave the words identifying the persons against whom a claim or complaint must be made a necessary role in defining the indemnity's scope.

5. Capita's construction left ordinary actions without regulatory involvement inadequately circumscribed and rendered part of the clause substantially surplusage. The clause's imperfect syntax, tautology and inconsistent punctuation did not displace its natural structure.

6. The commercial context did not require a broader indemnity. Capita also had warranties covering regulatory compliance, subject to contractual time limits, whereas clause 7.11 had no time or monetary limit. It was therefore commercially explicable to confine that indemnity to liabilities arising from third-party claims or specified complaints.

7. Mr Wood's liability could arise only where there was either a claim against the company, a seller or a relevant person, or a complaint registered with the Financial Services Authority, Financial Services Ombudsman or another authority against such a person. In either event, it also had to concern the pre-completion period and pertain to mis-selling or reasonably suspected mis-selling.

1. Court of Appeal (Civil Division): The seller's appeal was allowed unanimously. The indemnity was construed as requiring a specified claim or complaint for both categories of loss.

2. High Court, Commercial Court: Popplewell J, in [2014] EWHC 3240 (Comm), preferred Capita's construction. He held that the claim-or-complaint wording described regulatory losses and did not qualify the broader first category of loss.