Case Preview: Wood v Capita Insurance Services Ltd
08 Wednesday Feb 2017
On 7 February 2017 the Supreme Court heard the appeal of insurance company, Capita Insurance Services Limited (“Capita”), in a case that strikes at the heart of contractual interpretation. The Court is set to decide whether when interpreting a contract a court should first construe the term in question literally before then asking whether business common sense or other considerations dictate a different interpretation. Given that the Court of Appeal in this case reached its decision in favour of Mr Wood with reference to the Supreme Court’s 2015 decision in (Arnold v Britton  UKSC 36), in which Lord Neuberger observed that “commercial common sense and surrounding circumstances…should not be invoked to under value the importance of the language of the provision which is to be construed”, how the Court’s decision in this case aligns with its recent decision in Arnold will be of keen interest to contract lawyers and litigators alike.
In April 2010 Mr Wood sold his company, Sureterm Direct Limited (“Sureterm”), to Capita for approximately £7.7 million under a share purchase agreement (“SPA”). It is alleged by Capita that following completion of the SPA, there were concerns that Sureterm may have been mis-selling insurance products to its customers. An internal investigation of the potential mis-selling found that Sureterm had increased the price between quotation and sale in 28,575 instances of a total of 81,002 sales. On 16 December 2011, Capita and Sureterm self-reported to the Financial Services Authority (“FSA”) and informed them of the findings of their investigations.
Capita’s case is that the FSA replied to say that it considered that Sureterm had misled its customers by manipulating risk data and taking advantage of vulnerable customers. The FSA, Sureterm and Capita then set up a voluntary remediation scheme for the benefit of Sureterm’s customers totalling over £2.4 million.
Clause 7.11 of the SPA provided the following provision, which was expressed to be a warranty but in effect was an indemnity in favour of Capita:
“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 related 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 relied on clause 7.11 in seeking indemnification from Mr Wood for the sums potentially owed under the remediation scheme.
High Court Decision
At first instance, Mr Justice Popplewell felt it beneficial to break clause 7.11 into constituent parts in order to aid discussion.
Firstly, the heads of loss within the clause:
- 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
Secondly, the qualifying conditions within the clause:
- 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 related 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.
By breaking the clause down in this way, it can be seen that the effect of the clause differs depending upon the interpretive approach. Critically, does (A) qualify both (1) and (2), or just (2)?
Mr Wood contended that conditions (A) and (B) qualified both (1) and (2) and that therefore Capita was not entitled to be indemnified given that no claim or complaint had actually been made to the FSA against Sureterm.
Alternatively, Capita asserted that (A) only qualified (2) and that it could therefore recover from Mr Wood as the remediation scheme was a “loss, costs, charge, expense or liability suffered or incurred” under (1) and was only qualified by (B).
In finding in favour of Capita, Mr Justice Popplewell gave three reasons:
- (1) was drafted so widely as to actually encompass all the types of loss and damage expressed in (2). (2) was therefore an illustrative subset of (1) and was thought to be expressively considering those losses of a regulatory nature – a conclusion that logically linked (2) to (A). Furthermore, if the condition in (A) applied to both (1) and (2) there would be no need for (2), when viewed as a subset of (1).
- Capita’s construction made commercial sense. Mr Wood’s obligation to indemnify them in respect of fines, compensation, etc. was not meant to arise only if customers lodged a claim or complaint with the FSA. The nature of mis-selling means that those customers who are mis-sold are unlikely to have the pertinent information to enable them to make a claim or a complaint.
- The fact that there is a comma at the end of (1) but not at the end (2) supported the position that (2) and (A) are linked. Furthermore, if Mr Wood’s construction was correct you would be left with the tautological position of indemnifying “claims…arising out of claims“.
Court of Appeal Decision
In overturning the decision of first instance, Lord Justice Clark (with whom Lady Justice Gloster and Lord Justice Patten agreed) relied on the following reasons:
- In reviewing the case law regarding contractual interpretation (Arnold v Britton  UKSC 36 and Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd  CLC 1, 103 being particularly significant) it can be said that “the clearer the language the less appropriate it may be to construe or confine it so as to avoid a result which could be characterised as unbusinesslike“.
- When looking at the structure of the clause, read as a whole, despite having a “degree of inelegance”, (A) and (B) are naturally conditions of both (1) and (2). Therefore, the language is sufficiently clear such that it is not appropriate to enforce a ‘businesslike’ outcome by interpretation.
- In support of this position, Lord Justice Clark was persuaded by Mr Wood’s counsel’s arguments regarding cats and dogs. His reason being, if one says, “I like cats and dogs which are black and fluffy”, it is quite unlikely that what one means is “I like cats which are fluffy and dogs which are black and fluffy”. This would be a quite unnatural reading; yet, this was the interpretive gymnastics being employed by Capita.
- Furthermore, if one does as Capita suggests and reads (2) and (A) together, then (1) and (B) must be capable of being read in sequence, however, this produces an incoherent clause incapable of application.
- Lord Justice Clark dismissed Popplewell J’s third reason above by stating “I do not regard the validity of my interpretation to be impugned because there is an element of tautology” and “I do not regard his erratic use of the comma as any real guide to meaning.”
- Lastly, Lord Justice Clark did not agree that Mr Wood’s construction was unbusinesslike. Lord Justice Clark stated that any mis-selling by Sureterm would likely involve a breach of warranties 14.1 and 14.3 of the SPA and therefore that, in seeking indemnification from Mr Wood, Capita need not place strict reliance on clause 7.11. Since the warranties were subject to limits as to when the claim could be brought and the amount that could be recovered (in contrast to the indemnities), the deal may have been a poor one from Capita’s point of view, although this was no reason to depart from the meaning that the Court of Appeal found the words used to have.
The decisions at first instance and on appeal could not be more conflicting. Consequently, the Supreme Court is set to consider the clause and its effect afresh. The role that business common sense should play in contractual interpretation is already the subject of a long line of authority; the decision that is handed down following the hearing should add a new chapter to that debate.