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Court’s approach to indemnity clauses

Andrew Wood v (1) Sureterm Direct Limited (2) Capita Insurance Services Limited
14 October 2014

The recent High Court case of Andrew Wood v (1) Sureterm Direct Limited (2) Capita Insurance Services Limited [2014] EWHC 3240 (Comm) provides useful guidance on the Court’s approach and interpretation of indemnity clauses. Peter Olymbios considers the points arising from the recent judgment.

Facts

Sureterm was an insurance broker which offered tailored policies to the classic car market. In or around August 2008 Sureterm began to sell motor insurance through online aggregator sites such as Confused.Com. Potential customers would obtain a quote on the aggregator site before Sureterm contacted them directly to sell the appropriate policy.  The Claimant, Mr Wood, was a director of Sureterm and held 94% of the shares.

In April 2010 Capita purchased the entire shareholding of Sureterm. Clause 7.11 of the Share and Purchase Agreement (SPA) provided for Sureterm to indemnify Capita, 

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”

Following Capita’s purchase, concerns were raised by employees as to Sureterm’s sales processes and that some customers had paid more than they had initially been quoted. A review was subsequently carried out by Sureterm and the findings were reported to the FSA. In September 2012 the FSA found that Sureterm had taken unfair advantage of customers by misleading them and that detriment had occurred. Sureterm and Capita agreed with the FSA to conduct a customer remediation exercise for those affected by Sureterm’s mis-selling.

The total loss to Capita was said to be £2,432,883.10 including sums to be paid to customers by way of redress, interest and the costs involved in the remediation scheme. Capita claimed that Mr Wood was liable to pay 94% of that sum and relied on the wording of the indemnity at Clause 7.11 of the SLA. Capita sought to recover this sum by way of counterclaim in proceedings brought by Mr Wood, and the Court considered the interpretation of the indemnity provision as a preliminary issue.

The main issue was whether Clause 7.11 required Mr Wood to indemnify Capita for claims or complaints that had not actually been made by a customer. The principal distinction between the parties was whether the words “following and arising out of claims or complaints registered with the FSA” (referred to as “Part A” by Mr Justice Popplewell), governed and qualified both (i) “all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred,” and (ii) “all fines, compensation or remedial action imposed on or required to be made”. Mr Wood contended that Part A applied to both whilst Capita claimed that it was intended to form part of (ii) only.  

Findings

In finding that Capita’s construction was to be preferred, Mr Justice Popplewell cited three reasons. Firstly, it was supported by language; the type of losses singled out in (ii) above were appropriate to a supervisory and regulatory context, a link which did not exist between Part A and (i). In any event, the wording in Part A was not to be characterised as a condition restricting the scope of either (i) or (ii).  Secondly, Capita’s construction was supported by the commercial context and practical consequences of the rival contention of Mr Wood. There were other ways of identifying customers who required compensation and the trigger of an FSA investigation should not be restricted to a customer lodging a complaint. Thirdly, there were some minor linguistic and syntactical points. For example the use of a comma after the word “incurred” in (i) and the absence of any comma in (ii) supported Capita’s construction of the indemnity clause.   

Comment

The judgment will be of interest to those drafting and entering into Share and Purchase Agreements. Insurers offering professional indemnity cover, in particular to the financial services sector, should also take note insofar as the judgment provides a useful insight into how a Court is likely to interpret indemnity clauses. The Court will consider the link between the types of losses/damage and the regulatory context, the commercial rationale and use of specific language/syntax.

The judgment should also serve as a warning to commercial organisations when negotiating the indemnity position; the drafting of relevant clauses will as always require careful consideration in order to avoid the risk of being exposed and accountable for significant losses arising out of future claims.

Contact

For further information please contact Peter Olymbios, Solicitor, on 020 7280 8819.

By Peter Olymbios

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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