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Years ago, legal documents didn’t have much punctuation, and they didn’t use commas and stops, let alone colons, to draft things. I’ve no idea how they managed. More recently (like, in the last century or so) things have changed and punctuation has become important. So, how important are commas?
Some commas aren’t really needed and are just a matter of style and you can do without them (like when I wrote ‘like, in the last century or so’, above, (or when I wrote ‘century or so’, above’ above…), or when I wrote ‘so, how important are commas’ above) (brackets can be quite important too). Others are rather important. There are rules as to how to read commas (and the lack of them), but they can be rather grey. Confusion over commas (and the lack of them) is now probably the biggest cause of dispute over the interpretation of contracts. A recent case is a good example.
Background: how do courts interpret contracts?
Judges can’t just decide what they want, but have to follow the law. The law can either be set down by Parliament (statute law) or can be set down by the courts (case law). Case law is based on the published reasons given by a court when coming to its decisions. The more important the court the stronger the case law it sets. All courts have to follow case law set down by senior courts. But over time the courts roll with the times and the higher courts keep developing the law to reflect the way society thinks.
The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed.
Case law has developed some broad principles. These principles include that language should be read in accordance with business common sense, and not in a pedantic or literal way. If the parties have used language that is capable of more than one meaning, the court should consider the implications of rival constructions, and is entitled to prefer the interpretation most consistent with business common sense.
But courts cannot just re-write contracts to say what they think would have been fair. In another recent case (Arnold v Britton), the Supreme Court made clear that while business common sense is an important factor to take into account, it should not be used to diminish the value of the words used. It is up to the parties to the contract to agree the terms, and if something is set out perfectly clearly in the contract which doesn’t seem to make commercial sense you still generally have to follow what it says.
Of course there can be lots of grey areas. As a rule, the more stupid a contract clause seems to be the more willing a court will be to find ambiguities in the drafting which it can then take apart and use to give a judgment it thinks will be fair in the circumstances. As the Supreme Court has said, ‘the clearer the natural meaning the more difficult it is to justify departing from it’.
A recent case is a good example of these grey areas:
In this quite recent case, Mr Wood sold Capita all the shares in his company Sureterm Direct Limited. This was an insurance company which specialised in classic cars.
The share sale agreement contained an indemnity under which Mr Wood agreed to indemnify Capita:
“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 Sureterm * following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against Sureterm, 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 of service.”
A pretty strong indemnity clause, you might think. Lots of words, anyway.
Soon after the deal was done, an internal review by Sureterm of its sales processes led to concerns that there may have been mis-selling. Sureterm reported its concerns to the FSA (as it had to). The FSA said that there had been mis-selling and that customers needed to be compensated. Sureterm and Capita agreed with the FSA to pay compensation of about £1.35 million.
Capita then brought a claim against Mr Wood under the indemnity for this amount plus all costs and expenses incurred in connection with the compensation arrangements.
What did the court rule?
Well, this went all the way to the Court of Appeal. Initially the High Court rules that Capita could recover under this indemnity. But Mr Wood appealed and the Court of Appeal upheld the appeal. It would take a while to explain the various thinking involved, but here is some of it in a nutshell:
As a lawyer, and hopefully as someone with a modicum of business commonsense, when I read this indemnity clause, I can’t see that it covers the circumstances in which Capita sought to bring a claim under it. Sureterm’s loss didn’t follow or arise from claims or complaints registered by the FSA. It followed from a self-referral to the FSA by Sureterm itself.
I would have said this even though there was no comma in the space which I have marked with an asterisk. If there had been a comma the position would really have been totally unarguable. On the other hand, if there had been a comma in the space which I have marked with two asterisks, and particularly if the following word ‘and’ had been removed, I might well have been on Capita’s side.
But because there was no comma in either place, there was arguably some possible ambiguity. And this could open the door to a court which might want to try to put an interpretation on the contract which it thought was fair.
The High Court did try hard. It ruled in Capita’s favour, effectively saying that as they saw no good reason for the parties agreeing that the indemnity should only apply if customers made claims or complaints they would bend over backwards quite a long way to interpret the wording the way Capita wanted. They effectively said the middle bit about fines etc following complaints (from ‘and all fines, compensation or remedial action’ to ‘…or any Relevant Person ** and’) was only given as an example of the type of the kind of claim that was intended to be covered by the indemnity, and therefore effectively interpreted the indemnity as though this middle bit didn’t exist. They were helped by the fact that there wasn’t a comma where I put my second asterisk, and by the fact that the whole clause generally wasn’t worded perfectly.
Mr Wood didn’t like this and appealed to the Court of Appeal, which overturned the High Court’s decision. It said the High Court’s interpretation didn’t make sense. It said that even though not having an indemnity for self-referred claims to the SFA was not a very good deal for Capita, this wasn’t enough reason for putting a tortuous interpretation on the wording so that it covered it. Also, Capita probably still had a measure of protection (albeit not as good as an indemnity) because there were some warranties in the agreement which it might have brought claims under (such as that Sureterm had carried out its business in compliance with financial services laws). Indeed, the fact that the indemnity was not subject to any monetary limit, unlike the warranties, could suggest that its scope was meant to be narrower. (If anyone wants me to do a piece on the differences between warranties and indemnities for a future newsletter please let me know).
In the leading judgment, Christopher Clarke LJ emphasised that when interpreting a contract:
- Care must be exercised in using business common sense as a determinant of construction. The court will not be aware of the parties’ negotiations, and what might appear to be lacking in business common sense from one party’s perspective might have been the product of a compromise necessary to reach agreement.
- Businessmen make bad bargains for a variety of reasons (including a weak negotiating position or poor drafting skills), and it is not the court’s role to improve a party’s bad bargain or to make it more reasonable by rewriting it.
- A balance has to be struck between the indications given by the language and the implications of rival constructions. The clearer the language the less appropriate it may be to construe it so as to avoid an unbusinesslike result. The more unbusinesslike the result of a given interpretation, the more the court may favour an alternative interpretation avoiding such a result. If the natural reading produces a wholly unbusinesslike result, the court may favour another, and possibly less obvious, reading. However, business common sense should not be invoked to undermine the importance of the language used.
There seems to be a slight trend by the courts back towards the stricter approach of not trying too hard to rewrite relatively unambiguous contracts.
You never know, this decision might be appealed and the Supreme Court might reach a different decision.
If you do have to go to court to get a decision on what a contract means, you are facing a bit of a lottery.
The obvious message here is to negotiate your contracts sensibly (using a good solicitor) and then to word your contracts very clearly (using a good solicitor) so that it is quite clear what everyone intends. That way if a dispute comes up everyone should be pretty clear what the contract says and they should be able to resolve things (using a good solicitor) without having to go to court.
Practical drafting advice: where an indemnity aims to capture a range of different losses that are capable of being triggered by a variety of events, rather than trying to cover everything in a single clause which may prove difficult to resolve into its component parts (as in this case) it might be better to break the provision down into a series of sub-clauses, as this often flushes out problems with the drafting.
I, like, like to think, that that, for the moment, just about, probably, covers:* it
*Next time: the importance of: the colon: for avoiding verbal indigestion.
Cases: Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd  EWCA Civ 839
Arnold v Britton  UKSC 36