Wood v Sureterm Direct Ltd & Anor

This is the trial of a preliminary issue ordered by Eder J on 4 April 2014. It concerns the construction of an indemnity provision in an agreement dated 13 April 2010 (“the SPA”) for the sale and purchase of the shares in the First Defendant (“the Company”). The Company is an insurance broker which primarily offers bespoke policies to the classic car market. Prior to the sale, the shares were held by Mr Wood, Mr Kightley and Mr Collinge in proportions 94%, 1% and 5% respectively. Each was a director of the Company. The Second Defendant (“Capita”) was the purchaser of the shares under the SPA.

By clause 7.11 of the SPA the sellers agreed to indemnify Capita in respect of losses pertaining to the mis-selling or suspected mis-selling of insurance products or services in the period prior to the share sale. The claim by Capita against Mr Wood under the indemnity is made by way of counterclaim in the proceedings. Mr Wood’s claim is not relevant to the preliminary issue.

At the heart of the construction issue is whether clause 7.11 requires Mr Wood to indemnify Capita if there has been no complaint or claim by a customer, but the Company or Capita is nevertheless liable or potentially liable to make compensation pursuant to law or in accordance with regulatory requirements. Capita’s indemnity claim alleges the following facts:

In around August 2008 the Company began to sell motor insurance via online aggregator sites such as Confused.Com. Sales through those aggregator sites were not made automatically online; potential customers would obtain a quotation from the Company on the aggregator site, and the Company would then contact the potential customer directly with a view to confirming their risk details before selling them an appropriate insurance policy.

Shortly after Capita’s purchase of the entire shareholding of the Company, various employees raised concerns about the Company’s sales processes, including in particular that certain customers had paid substantially more than they had initially been quoted in circumstances where neither their risk profile nor the underwriting premium had changed significantly upon the customer being contacted by the Company. Rather the Company had significantly increased its own fees without informing the customer of why exactly the quotation was increasing.

In early 2011, in response to these concerns, the Company carried out a review of its sales. This found that for a period of approximately two years between January 2009 and January 2011 the Company had increased its own arrangement fee between quotation and sale in 28,575 instances out of a total of 81,002 sales made using online aggregator sites. In over 5,000 instances the arrangement fee had increased by more than £100 between quotation and sale, and in 158 instances the increase had been by more than £450. In most of the sales sampled, telephone operators had placed the customer on hold and given the customers the impression that they were in discussion with an underwriter, when it was likely that they were not. In the vast majority of cases sampled customers were misled as to the nature of the quotation given by the online aggregator site in order to justify the insurance policy offered being more expensive, and accordingly allowing the Company to charge a higher arrangement fee. In particular it was found that telephone operators consistently misrepresented the total price, comprising the underwriting premium and the Company’s own arrangement fee, as being solely the underwriting premium. In more than 10% of the cases sampled undue pressure was placed on the customer, based on erroneous information, in order to ensure that the sale was made. In many cases sampled, changes were made to the customer’s risk profile when information to make such a change had not been obtained from the customer.

Capita and the Company were obliged to inform the Financial Services Authority (“FSA”) of their findings and they did so on 16 December 2011. By a letter dated 21 September 2012 the FSA informed Capita and the Company that it considered that the latter’s findings illustrated that customers suffered detriment at the hands of the Company’s sales advisors; that the Company took unfair advantage of customers by misleading them, by manipulation of risk data, by taking advantage of vulnerable customers and through undertaking pressurised selling techniques; that customers were treated unfairly; and that detriment occurred and redress was due.

In November 2012 the FSA conducted a Risk Assessment Visit in relation to the Company, at or following which Capita and the Company agreed with the FSA to conduct a customer remediation exercise for those customers identified as potentially affected by the Company’s mis-selling (“the Remediation Scheme”). Deloitte LLP was appointed to provide independent validation of the Remediation Scheme.

Capita claims that as a result, Capita, the Company, and Capita’s other subsidiaries have suffered loss and damage, incurred charges, expenses and liabilities, and been required to pay compensation and make other payments relating to the period prior to the SPA which pertained to mis-selling and/or suspected mis-selling of insurance and/or insurance related products and/or services. The amount of loss identified includes an estimate of principal sums liable to be paid to customers by way of redress in an amount of approximately £1.35 million; interest of some £400,000; and costs involved in relation to the Remediation Scheme. The total claim is £2,432,883.10.

Capita claims that Mr Wood is liable to pay his respective proportion of 94% of these sums by virtue of the indemnity at clause 7.11 of the SPA which provides:

The SPA defined certain of the terms used in clause 7.11 as follows:

The preliminary issue which Eder J ordered to be tried was framed in terms which are not conducive to identifying the real nature of the dispute. Before me the parties agreed that the construction issue was more easily understood if posed and answered by reference to the rival arguments which are apparent from the following arrangements of the wording of the clause.

Capita contends that the clause should be read as follows.

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 the Company following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, the Sellers or any Relevant Person

and [in each case] which relate to the period prior to the Completion Date pertaining to any mis-selling or suspected mis-selling of any isurance or insurance related product or service.”

Mr Wood submits that the clause is to be read in the following way:

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 the Company

For ease of exposition I will label the constituent parts of the clause as follows:

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 the Company

following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against the Company, 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 or service.”

The critical distinction between the rival constructions is whether the words in (A) govern and qualify both (1) and (2), as Mr Wood contends, or only (2), as Capita contends.

Before expressing my conclusion and reasons, I should record that three aspects of the clause, which are neutral in resolving the disputed question of construction, were common ground. First, the twin requirements in (B) apply to the whole of the clause. The types of loss in (1) and (2) only trigger the indemnity if they pertain to mis-selling or suspected mis-selling of insurance related products and services, and if they relate to the period prior to the Completion Date (which was defined as the date of the SPA). The words “and which” attach the final part of the clause to the whole of what has gone before. Secondly “pertaining to” in (B) introduces a causative test. Thirdly “suspected mis-selling” in (B) imports an element of objectivity: there must be reasonable grounds for the suspicion; mere subjective suspicion is not sufficient.

I have concluded that Capita’s construction is to be preferred for three main reasons.

The first is that it is supported by the language of (2) and its overlap with (1). It was common ground that the types of loss and damage enumerated in (1) (“all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred”) are framed in wide enough terms to encompass all the types of loss and damage enumerated in (2) (“all fines, compensation or remedial action or payments imposed on or required to be made by the Company”). This suggests that (2) was included to be illustrative of losses which fell within (1), a technique commonly employed for the avoidance of doubt. The types of loss or damage singled out in (2) (fines, compensation, remedial action etc) are particularly apposite to a supervisory and regulatory context, which is what is provided for in the immediately following words in (A). This suggests a link between the content of (2) and the following wording in (A) which is absent in relation to the content of (1). In the context of financial services regulation and supervision, there is an obvious commercial rationale for explicitly bringing within the scope of the indemnity particular losses of the kind illustrated in the combined wording in (2) and (A), in order to avoid any argument that (1) was not wide enough to cover, for example, penalties or sanctions. If, on the other hand, the regulatory related wording in (A) applied to both (1) and (2), as Mr Wood contends, there would appear to be no purpose in including a narrower definition of certain types of loss in (2) which are already covered in (1).

The wording in (A) is not therefore to be characterised as a condition qualifying and restricting the scope of either (1) or (2). It is part of the description of losses identified in (2); the description in (2) and (A) is intended as illustrative of the scope of the indemnity in (1), not as a separate category of indemnified loss.

Secondly Capita’s construction is supported by the commercial context and the practical consequences of the rival contentions. In the regulatory environment in which the Company had to operate, the FSA or other supervisory authorities might become involved in a number of different ways. For example there might be a claim or complaint by one or more customers to the FSA. There might be whistleblowing to the FSA by an employee. The FSA might be prompted to investigate by management coming upon actual or suspected mis-selling and referring the matter to the FSA, consistently with its regulatory duties. The FSA might require an investigation as a result of a perceived marketwide problem of mis-selling in particular products. All these might lead to the identification of customers whom the FSA or other supervisory authorities required to be compensated, or whom the Company acting in accordance with its regulatory responsibilities might properly decide to compensate, as well as the imposition of administrative penalties or sanctions. There is no good reason why the happenstance of what triggers an FSA investigation should be determinative of the sellers’ obligation to indemnify in respect of the consequences of the investigation. There is no good reason why any such compensation or penalty should only fall within the indemnity in respect of such customers as had lodged a claim or complaint to the FSA, if any, or to the extent that a causative link could be established with any such claim or complaint. Why should the indemnity be engaged only when an FSA investigation has been triggered by a customer complaint but not by employee whistleblowing or responsible management referral? It is in the nature of mis-selling claims that customers who have been mis-sold are commonly unaware of the fact prior to regulatory intervention and may never have lodged a complaint or made a claim. I was not persuaded by Mr Twigger QC’s answer that such a restriction would enable the buyers or sellers to assess the likely scope of the indemnity by reference to the past history of claims and complaints; past claims/complaints could afford no sensible or reliable guide in the context of mis-selling financial products and services.

Moreover Mr Wood’s construction would produce the anomalous result that if, following an FSA investigation, the FSA required the Company to compensate all customers where the selling met certain criteria, and the Company wrote inviting such customers to lodge a claim and agreeing to pay it, the indemnity would be engaged; whereas if the Company merely sent the customers a cheque in fulfilment of its obligations without inviting a claim it would not.

Thirdly there are a number of more minor linguistic and syntactical points which support Capita’s construction. The comma after “incurred” at the end of (1) coupled with the absence of any such comma after “Company” in (2) points in that direction. So too does the fact that if Mr Wood’s construction were correct it would provide clumsy and tautologous cover for “claims …arising out of claims…”. The second reference to claims is more naturally read as applying to the words which follow, referring to claims or complaints registered with the FSA etc.

Accordingly the preliminary issue will be resolved in Capita’s favour.