A shake of this [contextual factors] and a pinch of that [textual factors]: The contractual mix to interpreting your contract.

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A shake of this [contextual factors] and a pinch of that [textual factors]: The contractual mix to interpreting your contract.

Our Director of Dispute Resolution, Richard Cooper, looks at the recent decision in Wood (Respondent) v Capita Insurance Services Limited (Appellant) [2017] UKSC 24

Imagine the situation, you have paid in excess of £7.5 million for a Company, taken over the business, and your employees start identifying that something is remiss as it appears the Sellers have previously acted in regulatory breach.

You are obliged to report the perceived regulatory breaches to the regulator, which you rightly do, resulting in fines, damages and costs totalling £2.4 million.

What do you do? You turn to the Contract and breathe a sigh of relief as it contains the following clause.

The Sellers undertake to pay to the Buyer an amount equal to the amount which would be required to indemnify the Buyer and each member of the Buyer’s Group 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.”

You make the claim against the Seller and the Seller says it is not liable because the liability did not arise out of “claims or complaints,” against the Company, but arose from your decision to self-report.

You argue that the clause provides for an indemnity for all losses arising from mis-selling as that was clearly the intention of the parties, and the contract should be interpreted that way.

You have a contractual interpretation dispute – time for an intake of air!

The above facts came before the Supreme Court in February this year. The Supreme Court decided that the indemnity did not operate so as to provide an indemnity in the circumstances claimed by the Buyer, and in so doing set out how the Courts, and lawyers, should approach disputes concerning contractual interpretation.

The Supreme Court said that in resolving opposing arguments as to the meaning of a contractual terms it was necessary to consider the disputed clause both in its “textual” and “contextual dispute”.

Textual Context

Considering a disputed clause in its “textual context” means that the Court will consider the ordinary or literal meaning of the wording in question.

Having considered the literal meaning of the clause in question, the Supreme Court was of the view that the literal meaning was that the clause was limited to indemnifying losses arising from “claims or complaints” and not from losses arising from self-reporting.

The Supreme Court recognised that a “textual” or “literal” interpretation would be given more emphasis where the agreement had been drafted by experienced draftsman.

The Supreme Court recognised that where a contractual term had been drafted by non-expert draftsman it may not necessarily reflect the true agreement and greater emphasis might then have to be given to the context, “contextual interpretation” in which the clause was agreed. The Court recognised that there could be exceptions to this approach.

Contextual Context

Having considered the “textual context” the Supreme Court identified that it was a requirement to consider the clause in its context, both in the context of the wording of the contract as a whole and the factual background in which the clause was agreed.

The starting point of the Supreme Court on a contextual analysis was that the indemnity clause was intended to compensate the Buyer for losses suffered as a consequence of mis-selling – the business sense interpretation.

The Court then moved to consider the context of the clause in the agreement as a whole and placed great weight on the fact that the parties had agreed significant warranties which were limited in quantum (the amount that could be claimed) and time within which claims had to be made.

In its context the Supreme Court was of the view that it would have been unlikely that the Sellers would have agreed to warranties which were limited in terms of time and quantum, only then to have then agreed an unlimited indemnity both in terms of quantum and time by way of a different clause.

The Supreme Court held that the “textual” interpretation and the “contextual interpretation” were not mutually exclusive, and that on a true analysis they both pointed to the fact that the indemnity was limited to “claims and complaints” made by customers to the FSA and not losses arising from self-reporting.

See: Wood (Respondent) v Capita Insurance Services Limited (Appellant) [2017] UKSC 24

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