The courts have, once again, reminded practitioners that it is not the job of the court to rewrite a bad bargain. In a recent the case the Court of Appeal concentrated on the natural meaning of the contractual language rather than using a commercial common sense approach to interpretation.
In Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd  EWCA Civ 839 the Court of Appeal (CA) held that an indemnity given by the sellers in a share purchase agreement (SPA) did not cover the buyer's claim.
In a move away from the recent trend of more liberal approaches to interpreting contracts, the CA warned against interpreting contracts using commercial common sense and focused instead on the natural meaning of the language in question.
In the case Capita bought a company from three individuals. The SPA contained an indemnity which covered any mis-selling claims or complaints registered with the FSA. On a review of previous sales activities Capita became aware that the target’s customers had been misled and sought to compensate those customers for the mis-selling. Capita sought to recover the money paid out to customers, plus expenses, from the sellers.
The sellers argued that, because there had never been any claims by customers or complaints registered with the FSA, the indemnity was not engaged. This was rejected in the High Court but on appeal the CA accepted this interpretation. The indemnity should be read as a whole – this was how it had been drafted – and just because the deal was poor for Capita this did not justify a different interpretation of the indemnity.
The CA was keen to point out that a cautious approach should always be taken when using common sense in contract interpretation. A provision may have been negotiated by the parties and be the result of a compromise – reference to the context of a particular clause is always required. It is not the court’s role to rewrite contracts and make deals more commercially balanced.
The important thing to take away from this case is that if, as several recent cases suggest, the courts are becoming less willing to apply a liberal approach to contract interpretation it is the role of the draftsperson to ensure there is clarity in the drafting and little room for different interpretation. The contract should be considered as a whole and each provision must be considered in relation to the whole. If you are ever unsure it may even be worth requesting an experienced litigator to review the contract and highlight any potential areas of dispute. In practice, another way of dealing with this issue is to break down clauses into subsections rather than covering swathes of events in long, complex sentences.
This article was written by Caroline Swain. For more information please contact Caroline on +44 (0)20 7203 5158 or at firstname.lastname@example.org