Contractual interpretation – guidance from the Supreme Court
The United Kingdom Supreme Court (UKSC) has recently considered the different contractual interpretive approaches of textualism and contextualism and confirmed that while the suitability of their application may vary depending on the facts of each case, they are not conflicting paradigms;
Wood (Respondent) v Capita Insurance Services Limited (Appellant)  UKSC 24 (On appeal from  EWCA Civ 839).
The facts were that a Company in the business of selling motor insurance through popular online aggregate sites (Comparethemarket.com, Confused.com and so on) was purchased by Capita in 2010 for £7,681,661 plus a further sum in deferred consideration. Shortly after the purchase, employees of the Company raised concerns about the sale process which had resulted in some customers paying substantially more for an insurance policy than originally quoted and with no material reason for this increase. Capita and the Company reported this to the Financial Services Authority (now the Financial Conduct Authority), and agreed a compensation scheme.
A claim was originally brought by Mr Wood, the Director of the Company as a result of the termination of his employment however this sparked the counter-claim which became the subject of the UKSC’s attention; did the indemnity clause in the Share Purchase Agreement (SPA) cover the circumstances that had arisen namely the loss caused as a result of mis-selling and the consequential creation of a compensation scheme.
The interpretive difficulty was that on a textual interpretation the indemnity clause required a customer or customers to make a claim or complaint to the regulatory authorities of mis-selling, however should management (complying with their regulatory obligations) report exactly the same mis-selling themselves the indemnity clause was not triggered. Clearly in both scenarios the same mis-selling causes the loss, but the indemnity clause differentiated between the two scenarios set out above, so the question was, should the provision be interpreted textually and therefore exclude the loss, or contextually and therefore (Capita argued) include the loss ?
UKSC Guidance on contractual interpretation
In considering previous cases on contractual interpretation Lord Hodge (who delivered the judgement with which the other Lords agreed) considered the context in which the SPA was drafted and noted that when both parties to a contract were legally represented the inclination was to focus on a textual analysis, or to put it another way, follow the contract to the letter, however the extent to which this approach is correct will vary on the circumstances. For example, he considered that while both parties were legally represented and/or sophisticated in negotiating this type of agreement, this may in turn mean that there were many conflicting objectives meaning that the terms agreed in fact lacked clarity so as to please both sides. Such circumstances may then lend themselves to a more contextual interpretation which might traditionally be reserved for contracts that are brief or have been drafted without legal assistance. Lord Hodge helpfully summarises this as follows:
“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. The extent to which the tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements.”
While on any contractual interpretation the loss remains the same, it is the cause of the loss being either the reporting of the mis-selling to authorities for which the clause did not kick on, or the reporting of the same loss by a customer, for which the clause did kick in.
In using both textual and contextual interpretations of the contract the UKSC considered that Capita was not entitled to recover for the loss under the indemnity clause. Part of the relevant matrix for reaching this conclusion was that Capita was able to recover such loss under the warranties, but were out of time to do so, therefore upon consideration of the whole contract the wording of the indemnity clause was not as absurd as it initially seemed.
However the difficulties in selecting the correct mix of interpretative tools probably remains and this is somewhat evident by the decision of the court at first instance that the indemnity clause did cover the loss and the subsequent decision of the Court of Appeal that the indemnity clause did not cover the loss.