Interpretation and construction

2017 SCMR 1116 SUPREME-COURT-OF-UK Judicial Precedent

Indemnity clauseInterpretation and construction'Indemnity clause subject to a time limit, and triggered only in limited circumstances'

Buyer-company purchased the entire share capital in an insurance brokerage company ("the company") from the seller (defendant)

Agreement made between the parties contained an indemnity clause whereby the seller 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 buyer carried out a review of the company which revealed that in many cases the company's telephone operators had misled customers to make a sale

Buyer was obliged to inform the Financial Services Authority, which in turn informed the buyer that customers had been treated unfairly and had suffered detriment

Buyer agreed to compensate the customers affected by the mis-selling

Subsequently buyer made a claim against the seller under the indemnity clause alleging that the company had suffered loss resulting from 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

Seller defended the claim by contending that the circumstances fell outside the scope of indemnity clause as the requirement to compensate which had arisen was not as a result of a claim by the company's customers or a complaint by those customers to the Financial Services Authority or another public authority

Trial 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

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

Held, that the indemnity clause was poorly drafted and its meaning was avoidably opaque, therefore it was necessary to adopt an iterative process in order to examine the clause both through a textual analysis of the words in the context of the contract as a whole, and to consider whether the wider relevant factual matrix could provide guidance as to its meaning in light of the commercial effect of rival interpretations

Careful examination of the contractual language identified the circumstances which would trigger the clause

Buyer's suggested construction of the indemnity clause was not correct because it would have the effect that the clause would fail to specify against whom the relevant actions, proceedings and claims could be made; that there must be a limit on who such persons could be as it would be absurd for the buyer to have a claim against the seller for indemnity resulting from any mis-selling on its part before the completion of the sale of the company

Contractual context was also significant in the present case

Mis-selling which the indemnity clause addressed was also covered by the warranties in the Schedule to the agreement between the parties

Scope of indemnity clause, breach of which gave rise to a liability unlimited in time, must be assessed in the context of the detailed and time-limited warranties in the Schedule to the agreement

Buyer had two years after completing the purchase to make a claim under the Schedule covering warranties, which was not an unreasonable time scale

Two years' time provided under the warranties was not an unreasonably short period of time in which to conduct an internal review for any relevant mis-selling/regulatory breaches in order to bring a claim under the warranties; that it was not contrary to business common sense for parties to agree wide-ranging warranties, which were subject to a time limit, and in addition to agree a further indemnity, which was not subject to any such limit but was triggered only in limited circumstances

While the agreement may have become a bad bargain for the buyer, given their failure to bring a claim in time under the warranties, it was not the court's role to construe the indemnity in a way that improved their bargain

Court of Appeal was correct on the meaning of the indemnity clause

Appeal was dismissed in circumstances.