When it comes to contract interpretation, courts have, in recent years, adopted two conflicting perspectives.
On the one hand, courts have approached the issue of contract interpretation by applying business common sense principles, seen in Supreme Court's decision in Rainy Sky v Kookmin Bank (2011). It was held in Rainy Sky that, where language is ambiguous in a contract, the preferred interpretation is that which is most consistent with business common sense.
Subsequently, courts have been keen to place more emphasis on the natural meaning of a provision, for example, in the judgment of Arnold v Britton (2015).
In Wood v Capita Insurance (2017), Capita Insurance Services had acquired Sureterm Direct Limited, a specialist car broker.
Under the share purchase agreement, Sureterm agreed to indemnify Capita in respect of (during the period prior to the acquisition):
"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 [Sureterm] following or arising out of claims or complaints registered with the Financial Services Authority against [Sureterm]…pertaining to any mis-selling or suspected mis-selling of any insurance…"
Following the acquisition, a number of Sureterm's employees identified instances of mis-selling and Sureterm reported its findings to the FSA, which found that Sureterm's customers had been treated unfairly, ordering a payout of around £1.35 million compensation to affected customers.
Capita subsequently sought to recover this sum from Wood under the indemnity, with Wood disputing the claim on the basis that the indemnity did not apply because the compensation resulted from Sureterm self-reporting of mis-selling to the FSA, as opposed to a claim or complaint by Sureterm's customers to the FSA.
Capita argued that the court had placed too little emphasis on the context (which was at odds with Rainy Sky) and had instead focussed too heavily on the indemnity wording. Capital lost its appeal in the Supreme Court.
Wood v Capita recognises the two conflicting perspectives adopted in Rainy Sky and Arnold and instead adopts a more neutral standpoint when it comes to contract interpretation.
In Wood, the court acknowledges that the differing approaches are not necessarily mutually exclusive and each play an important role in interpreting contract terms, confirming the relevance of applying business common sense, whilst also stressing the importance of the quality of drafting of the clause.
What can be taken away from the guidance in Wood is that both approaches to contract interpretation (business common sense/examining literal meaning) should be considered when interpreting contract terms and that, unlike the dichotomy of Rainy Sky and Arnold, one approach should not necessarily take precedence over the other. Instead, a balancing exercise should be undertaken between the two, with the particular circumstances of the case determining whether "textualism" or "contextualism" should prevail.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions