The buyer purchased the entire share capital in an insurance brokerage company from the defendant seller and two others. The agreement made between the parties contained an indemnity clause whereby the sellers undertook to pay the buyer an amount equal to the amount required to indemnify the buyer against, inter alia, “all fines, compensation or remedial action or payments imposed on ... the company ... arising out of claims or complaints registered with” inter alia, the Financial Services Authority (“FSA”) against the company. Shortly after the purchase the company’s employees raised concerns about some of the company’s sales processes. The company carried out a review which revealed that in many cases the company’s telephone operators had misled customers. The buyer was obliged to inform the FSA which informed the buyer that customers had been treated unfairly and had suffered detriment. The company agreed with the FSA to conduct a scheme for compensation to be paid to customers affected by the mis-selling. The buyer made a claim against the seller under the indemnity clause alleging that the company and its subsidiaries had suffered loss resulting from mis-selling or suspected mis-selling of insurance products in the period prior to the completion of the sale of the company and that the contractual indemnity was not confined to loss arising out of customers’ complaints. The seller defended the claim on the ground that the compensation scheme fell outside the scope of the terms of the indemnity clause. The judge construed the indemnity clause as requiring the seller to indemnify the buyer even though there had been no claim or complaint by a customer and accordingly gave judgment for the buyer. The Court of Appeal construed the indemnity clause as being confined to losses arising out of customers’ claims or complaints and accordingly .allowed the seller’s appeal
On the buyer’s appeal—
Held, dismissing the appeal, (1) that the court’s task in interpreting a contractual term was to ascertain the objective meaning of the language which the parties had chosen to express their agreement; that, as had long been accepted, that was not a literalist exercise focused solely on a parsing of the wording of a particular clause but the court had to consider the contract as a whole and, depending on its the nature and formality and the quality of its the drafting, give more or less weight to elements of the wider context in reaching its view as to that objective meaning; that the interpretation of a contract was a unitary exercise and, where there were rival meanings, the court could give weight to the implications of rival constructions by reaching a view as to which construction was more consistent with business common sense; but that, in striking a balance between the indications given by the language and the implications of the competing constructions, the court had to consider the quality of drafting of the clause and also to be alive to the possibility that one side might have agreed to something which, with hindsight, did not serve his interest; that similarly the court should not lose sight of the possibility that the provision might be a negotiated compromise or that the negotiators were unable to agree more precise terms; that that unitary exercise involved a iterative process whereby each suggested interpretation was checked against the provisions of the contract and its commercial consequences were investigated; that when interpreting any contract, textualism and contextualism could be used as tools to ascertain the objective meaning of the language which the parties had chosen to express their agreement, and the extent to which each tool would assist the court in its task would vary according to the circumstances of the particular agreements; that agreements which were sophisticated and complex because they had been negotiated and prepared with the assistance of skilled professionals might be successfully interpreted principally by textual analysis; that the correct interpretation of other contracts, for example those which lacked clarity because of their informality, brevity or the absence of skilled professional assistance, might be achieved by a greater emphasis on considering their factual matrix and the purpose of similar provisions in contracts of the same type; that that approach to contractual interpretation was confirmed by recent case law and the recent history of the common law of contractual interpretation which was one of continuity rather than change.
Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900, SC(E) and Arnold v Britton [2015] UKSC 36; [2015] AC 1619, SC(E) explained.
(2) That the disagreement between the judge and the Court of Appeal who had reached opposing conclusion in the interpretation of the disputed indemnity clause had not been caused by any failure to apply the correct principles but was the result of the clause not having been drafted with precision so that its meaning was avoidably opaque; but that, on analysis of the clause, the Court of Appeal’s interpretation was correct.
Edward Cumming (instructed by Enyo Law LLP) for the buyer.
Andrew Twigger QC (instructed by Birketts LLP, Norwich) for the seller.