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Contractual interpretation: Supreme Court decision on contractual interpretation – Wood v Capita Insurance Services Ltd [2017] UKSC 24

Published on 12 June 2017

What is the current approach to contractual interpretation?

The facts

Capita entered into an SPA with Mr Wood and others for the acquisition by Capita of the entire issued share capital of a specialist car insurance broker. The dispute concerned an indemnity clause in favour of the buyer. This was for losses “following and arising out of claims or complaints registered with the FSA…against the Company…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”.

Shortly after Capita’s purchase of the Company’s share capital, employees of the Company raised concerns about the Company’s sales processes. This led to a review which revealed that in many cases the Company’s telephone operators had misled customers. Capita and the Company were obliged to inform the Financial Services Authority (FSA) of the findings. The FSA informed them that the customers had been treated unfairly and had suffered detriment. Capita agreed to a remediation scheme with the FSA. Capita sought to recover its losses under the indemnity, whilst Mr Wood and the other sellers took a more restrictive interpretation whereby Capita would not recover unless a claim or complaint had been made against the Company.

The Commercial Court found for Capita but the Court of Appeal found for Mr Wood. Capita appealed to the Supreme Court.

The decision

The Supreme Court dismissed the appeal.

The key points from the judgment are:

  • Arnold v Britton did not involve a recalibration of the guidance given in Rainy Sky, and the two cases were saying the same thing about the approach to contractual interpretation

  • the court’s task is to ascertain the objective meaning of the language used in the contract. This is not a literalist exercise focused solely on a phrasing of the wording of the particular clause. The court must consider the contract as a whole and, depending on its nature, formality and quality of drafting, give more or less weight to elements of the wider context

  • where there are rival meanings, the court can reach a view as to which construction is more consistent with business common sense. In striking a balance between the indications given by the language and the practical implications of competing constructions, the court must consider the quality of the drafting of the clause, and be alive to the possibility that one side has struck a bad bargain

  • contractual interpretation involves an iterative process where each suggested interpretation is checked against the provisions of the contract and its commercial consequences investigated

  • textualism and contextualism are not conflicting paradigms. Both can be used as tools to ascertain the objective meaning of the language used in a contract, and the extent to which each tool will assist will vary according to the circumstances. Some contracts might be successfully interpreted principally by textual analysis (for example, due their sophistication and complexity, or where they have been negotiated and prepared with the input of skilled professionals), while the correct interpretation of others might demand greater emphasis on the factual matrix (for example, due to their informality, brevity or the absence of skilled professional assistance).

Why is this important

The Supreme Court has clarified the test for contractual interpretation. Arnold and Rainy Sky are complementary, not conflicting.

Any practical tips

This case highlights the importance of careful drafting. Leaving a clause opaquely and unclearly drafted can leave your agreement to the interpretation of the courts, who will not necessarily decide in your favour. Ensure that you explain the commercial and factual background of the agreement, making use of the recital and acknowledgement provisions. This is particularly important if the agreement contains an onerous or unusual provision.