Contractual interpretation and commercial context
In Wood (Respondent) -v- Capita Insurance Services (Appellant) (2017), the Supreme Court held that an indemnity in a share purchase agreement (SPA) did not cover the costs of a remediation scheme agreed between the purchaser of a company and the Financial Services Authority (the precursor to the Financial Conduct Authority) to compensate customers who had been identified as potentially affected by the Company’s misselling of insurance products before the completion date.
In reaching its decision, the Supreme Court examined the rules of contractual interpretation and confirmed that the exercise remains an iterative one by which conflicting interpretations are checked against the provisions of the contract and its commercial context. In this particular instance, an indemnity provision formed
part of an overall risk allocation regime within the SPA and therefore had to be read in conjunction with the extensive warranties in the document. This prevailed over a detailed analysis of the syntax of the clause in question.
Enforceability of a reasonable endeavours clause
The dispute in Astor Management AG and another -v- Atalaya Mining Plc and others (2017) centred upon the payment of deferred consideration under an agreement between the parties relating to the ownership and exploitation of a copper mine in southern Spain. After holding that the obligation to pay deferred
consideration had not been triggered because the specified source of funding had not been obtained, Leggatt J dealt with ancillary issues of reasonable endeavours and good faith.
In particular, he held that the obligation to use reasonable endeavours to enter into an agreement with a third party for funding was sufficiently certain to be enforceable and, as a general principle, unenforceability was very much a “last resort” of the court in such cases.
However, whether the obligation to use reasonable endeavours had been satisfied depended heavily on commercial factors and the economic viability of the project as a whole. The court confirmed that an obligation to use all reasonable endeavours to achieve an end does not require unlimited expenditure, which means that costs are a highly relevant factor in deciding what, if any, further steps are reasonable – and ultimately when to stop. Applying this to the facts in the case, the agreement with a third party for funding had to be commercially viable. On the evidence, only one lender was prepared to make available such a facility, and that was on terms which did not make economic sense. Accordingly, the defendant was not in breach of the obligation to use reasonable endeavours.
If you would like to view any of the other articles in Global Insurance Focus – May 2017, then please follow the links below:
A response to consultations on the regulatory framework for a UK market in insurance-linked securities
Draft bill to streamline regulation of Spanish insurance and pension plans
Turning crisis into opportunity: the future of Hong Kong’s insurance sector
The evidential value of underwriting guidelines in minimising indemnity disputes
