In Rainy Sky SA v Kookmin Bank in 2011 the Supreme Court took the contextualist approach, looking at the factual context and preferring the interpretation most consistent with business common sense. In Arnold v Britton in 2015 (which I blogged about here) the Supreme Court took the textualist approach, preferring the literal interpretation of the words used even if they gave an unjust result to one party. So have the courts now "rowed back" from contextualism towards textualism?
Not according to the Supreme Court in the latest case on the principles of contractual interpretation, Wood v Capita Insurance Services Ltd. According to Lord Hodge, "Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement."
Which tool you use depends on the contract. Sophisticated contracts which have been professionally drafted are more likely to be interpreted textually. But the court recognised that "negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement". (This all sounds familiar from my experience of negotiating deals.) More informal contracts which have been drafted without professional assistance are more likely to be interpreted contextually (perhaps because they may not make sense if taken out of the context and read literally).
Having made all that clear, the Supreme Court in Wood proceeded to uphold the Court of Appeal's literal interpretation of the contract (overruling the first instance judge's more contextual interpretation), but explained that this also made sense in the context. The clause in question was an indemnity in a share purchase agreement by which Capita acquired a motor insurance broker specialising in classic cars. It read (my highlighting):
“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.”
Capita claimed £2.4m under the indemnity re the cost of a remediation scheme required by the FSA (now the FCA) to compensate customers for mis-selling, but the problem was that it had not followed and arose out of complaints by customers but from self-reporting by the company in accordance with regulatory requirements. On textual analysis of this "opaque" provision the Supreme Court held that it did not cover losses which followed or arose otherwise than out of complaints. Also looking at the context, it noted that there were wider warranties which did cover the loss (but were subject to a 2 year time limit which Capita had, for some reason, missed) and "It is not contrary to business common sense for the parties to agree wide-ranging warranties, which are subject to a time limit, and in addition to agree a further indemnity, which is not subject to any such limit but is triggered only in limited circumstances."
This last comment is very true, but in my experience indemnities usually focus on particular potential liabilities against which the buyer requires specific protection, and are not (or should not be) dependent on whether the liability arises in a particular way. This looks more like a case of poor drafting to me. But, as the court pointed out, it is not their function to improve a bad bargain.
All in all this is a helpful case in explaining how to go about interpreting contracts and what are the tools for the job, and it is good to see the Supreme Court showing such understanding of the realities of negotiating and drafting share purchase agreements.
I'm thinking of having a bumper sticker made for my BMW: "No tools of textual or contextual exegesis are left in this vehicle overnight".
