Language v factual matrix - which triumphs when interpreting contracts? The Supreme Court reveals...

Wood v Capita Insurance Services Ltd [2017] UKSC 24 29 March 2017

It has been long established that the courts take into account not just the language used in a contract to interpret its meaning, but also the background knowledge known to the parties at the time of the contract. But how much weight should be given to the actual language used as opposed to the factual matrix?

In Wood v Capita Insurance Services Ltd [2017] UKSC 24, Capita argued that the Court of Appeal had wrongly placed too much emphasis on the words used and not given enough weight to the factual matrix when it interpreted an indemnity clause in a Share Purchase Agreement. However the Supreme Court said this idea of there being a ‘battle’ between these approaches is wrong. Rather, they are both merely tools to help the court to ascertain the meaning, and the extent to which each tool will help the court will vary depending on the circumstances of the particular agreement or agreements:

  • some agreements may be best interpreted mainly by a textual analysis, particularly those which are sophisticated and complex and which have been negotiated and prepared with the assistance of skilled professionals;
  • some agreements may need a greater emphasis on the factual matrix, perhaps because of their informality, brevity or the absence of skilled professional assistance;
  • but sometimes even professional negotiators may not achieve a logical and coherent text, perhaps because of conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement, and it may be that the court in these situations is particularly helped by considering the factual matrix.

The Supreme Court said that what the court needs to do is check each suggested interpretation against the provisions of the contract and investigate its commercial consequences. First it should read the language in dispute and the relevant parts of the contract that provide its context. Next it should carry out a more detailed analysis, but it doesn’t matter whether it starts with the factual background and the implications of rival constructions, or a close examination of the relevant language in the contract, as long as it balances the indications given by each.

This is what the Supreme Court set on to do in the Wood v Capita Insurance case, where the disputed indemnity clause was in a complex agreement that had been drafted by lawyers. 

Language in dispute and contractual context

The indemnity clause was as follows:

“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.”

The sellers argued that the indemnity only covered losses caused by mis-selling which resulted from claims or complaints. The buyer (Capita) argued that it also covered losses caused by mis-selling which resulted from its self-reporting to the FSA following employee concerns. The Supreme Court said that a preliminary reading of the indemnity clause supported the seller’s interpretation. However it noted that elsewhere in the contract there were wide-ranging warranties which covered the situation which had arisen, albeit there was a two year time limit for notifying warranty claims whereas the indemnity was not time-limited. Therefore the contractual context was significant in this case.

Detailed analysis

Looking at the factual matrix, all parties were commercially sophisticated and experienced in the insurance broking industry, however Capita had not been involved in the management of the Company and this was why the sellers had given warranties about how the business had been operated. Business common sense suggested that Capita would want as broad an indemnity as possible against the consequences of mis-selling, but mis-selling was also covered in the warranties and business common sense would also suggest that the sellers would want to minimise their liability after the two year time limit for notifying warranty claims had expired, and two years was a reasonable time period for Capita time to learn of the Company’s sales practices and uncover any mis-selling. 

Carrying out a close textual analysis, on both side’s arguments some wording would be rendered otiose. However, the court took the view that on Capita’s interpretation the wording that would have been otiose would have been “remarkable and unlikely” (the identity of the persons against whom the relevant claims could be made so as to trigger the sellers’ indemnity would be left to implication). The Supreme Court rejected Capita’s arguments on tautology, use of commas and other points of grammar, stating that tautology in commercial contracts was not unknown, there are no set rules for the use of commas (and in any event the use of commas in this clause was erratic) and that the detailed points of style and syntax relied on were of little assistance in construing an admittedly opaque clause

Returning to the commercial context and the practical consequences of the rival interpretations, the general purpose of the indemnity clause was to indemnify Capita against losses occasioned by mis-selling. Looking at the clause in isolation, limiting the indemnity to mis-selling prompted by claims or complaints and excluding loss caused otherwise did seem anomalous. However this was not the case when the warranties were considered. Because of this, the contractual indemnity was confined to loss arising out of a claim or complaint, meaning Mr Wood was not liable under the indemnity clause.

In this case, the meaning of the indemnity was found principally in a textual analysis of the contract.

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