This case of Wood v Capita Insurance Services Limited provides a fresh update on indemnity clauses in commercial agreements. Although the facts of the case are not strictly related to construction, it is important to note the principles that will apply when it comes to drafting indemnity clauses in construction contracts, warranties and other consultant appointments.
In brief, Capita acquired an insurance brokerage company (Sureterm) from Mr Wood. Shortly after the transaction, staff at Sureterm raised concerns with Capita about its sale processes. Capita conducted a review and found out that Sureterm had been misleading its customers in order to make sales. Capita and Sureterm informed the Financial Service Authority and agreed to pay compensation to customers affected by the mis-selling.
The relevant clause in the Sale and Purchase Agreement, clause 17.11, provided an indemnity in the following terms:
“the Sellers undertake to pay to the Buyer an amount equal to the amount which would be required 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 payment imposed on or required to be made by the Company following rand arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Auhtority 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”.
Capita brought a claim against Wood under clause 17.11, alleging that it suffered loss because of the mis-selling prior to completion of the purchase. Wood claimed that the circumstances were outside the scope of the indemnity as the requirement to compensate was not as brought about by Sureterm’s customers or any complaints by those customers.
The High Court held that Wood was required to indemnify Capita even though no claim or complaints had been made by any affected customers.
The Court of Appeal reversed the decision in favour of Wood.
Capita appealed to the Surpreme Court arguing that Court of Appeal had placed too much emphasis on the literal meaning of the words in the indemnity clause and not given serious consideration of the facts of the matter.
The Supreme Court decision
The Supreme Court dismissed the appeal.
The Supreme Court stressed that the correct approach was to consider the contract as a whole and, subject to the nature and quality of drafting, give more or less weight in terms of commercial common sense.
The Court also rejected Capita’s argument that “all actions, proceedings, losses, claims, damages, costs, charges, expenses, and liabilities suffered or incurred” would trigger the indemnity clause, regardless of whether any complaints or claims had been lodged with FSA.
In reaching its decision, the Supreme Court relied on the wording of separate warranties provided by Wood in the SPA which covered the same aspects as the indemnity clause. Considering the SPA as whole, the Court concluded that it was Wood’s intention to limit its liability and exposure to further risks under the indemnity clause.
What does this mean for us
Again, this case shows the importance of clear drafting in commercial contracts. This is particularly relevant to construction contracts, consultant appointments and other security documents where standard indemnity clauses are often used. The case also shows the importance of considering the wider contractual context as the Court will use this to interpret the parties’ intentions.