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Indemnity Clause Uncertainty

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Indemnity Clause Uncertainty

Indemnity Clause Uncertainty

This case concerned two very different interpretations of an indemnity clause in a share purchase agreement.

Background to the Case

An indemnity is a promise by the seller to pay the buyer in the event of something causing the target company to lose money after completion, because of something that happened during the seller’s period of ownership. The indemnity clause was drafted as one, very long sentence. The case is an interesting and important lesson in really focusing upon what the parties want to achieve and capturing that precisely in the drafting. The clause was drafted as follows:

“…the Seller undertakes 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 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 Seller 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”.

What was the issue?

The issue in point was whether the buyer could claim against the seller under this indemnity. The buyer wanted to make a claim because after it had completed its purchase of the target company, it discovered that the target company was liable to pay compensation for mis-selling insurance products during the seller’s period of ownership.

The buyer said it could claim because the clause could be broken down into two types of loss or events giving rise to loss. Broadly, the buyer interpreted the drafting in the clause to mean that it could claim for:

(i) losses, claims, damages etc; and
(ii) fines, compensation etc imposed on or required to be made by the [target] company following and arising out of claims or complaints registered with the FSA

and which relate to the period prior to completion pertaining to mis-selling of insurance.

The buyer wanted to claim for loss arising under (i).

The seller said that the buyer could not claim because although the clause could be broken down into two sections of loss or events giving rise to loss, all of the types of loss or events in (i) and (ii) had to arise out of claims or complaints made to the FSA – the words “in each case” (see below) were effectively implied. The seller’s interpretation was that the buyer could claim for:

(i) losses, claims, damages etc: and
(ii) fines, compensation etc imposed on or required to be made by the [target] company

in each case following and arising out of claims or complaints registered with the FSA
and which relate to the period prior to completion pertaining to mis-selling of insurance.

The subtle but important point was that the insertion of the words “in each case” had the effect that all of the types of loss under limbs (i) and (ii) had to arise out of claims or complaints made to the FSA. No claim or complaint had been made to the FSA, instead the buyer and the company reported the mis-selling to the FSA.

The decision and its impact

The judge in the Supreme Court favoured the seller’s interpretation and the buyer was unable to claim. There was a right to recover under the warranties in the share purchase agreement but the limitation period within which to make claims had expired. The decision emphasises that courts will not rewrite clauses because one party has made a bad bargain and clauses will be interpreted using principles of construction and bearing in mind the objective intentions of the parties at the time the contract was entered into.

Wood v Capita Insurance Services Limited [2017] UKSC 24

For more information, contact Cathy Goodman, Corporate Professional Support Lawyer.