How important is context in interpreting a contract?

Dispute Resolution - 2 minutes read

I’ll start with the answer you’ll no doubt expect from a lawyer … it depends! ¬†At least, that opinion now has the force of the Supreme Court behind it.

They recently decided a case on the interpretation of an indemnity in a Share Purchase Agreement and reviewed the various authorities on taking a textual approach to interpreting a contract or a contextual approach.

Capita bought the shares in Sureterm, an insurance company, from Mr Woods and his fellow shareholders.  The SPA included an indemnity which said that the Sellers should:

“‚Ķpay to [Capita] an amount equal to the amount which would be required to indemnify [Capita]‚Ķagainst 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 [Financial Services Authority or other regulator]‚Ķagainst [Sureterm]‚Ķand 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.”

Capita intended this to cover any mis-selling of insurance companies. ¬†Shortly after completion of the transaction, one of Sureterm’s staff raised concerns about their sales process for a particular insurance product. ¬†As a result, Sureterm reported itself to the FSA, as it is required to do, and agreed with the FSA to take various steps to address its mis-selling, including putting in place a fund of ¬£1.35m to compensate its customers.

Capita sued under the indemnity in the SPA but Mr Woods argued that on the proper construction of the indemnity he was only liable if the customer had initiated the complaint to the FSA but not if the Sureterm self reported the problem.  The Supreme Court agreed with him, using a textual approach to the language rather than a contextual approach that the courts had used in previous cases.

In doing so, the Supreme Court clarified that the courts can use both a textual approach and a contextual approach to interpret a contact.  The courts will decide which to use depending on all the circumstances of the case.  If the agreement is detailed and has been negotiated and drafted by skilled lawyers is more likely to lead to a textual approach (as in the approach in this case).  If the agreement is shorter and drafted by non-lawyers, the courts are more likely to favour a contextual approach.

As a skilled commercial lawyer, I am always striving to draft contracts to minimise the risk that a court can interpret the same clause in more than one way.  A textual approach, done well, will reduce the chances of getting involved in a expensive dispute about what your contract means.