UK: Commercial Court Finds Indemnities Covered Negligence Where No Express Reference

The Commercial Court has found in favour of Herbert Smith Freehills' client PA(GI) in a trial of preliminary issues concerning claims for indemnification of PPI liabilities and related costs and expenses under a business transfer agreement and deed of warranty and indemnity: PA(GI) Ltd v Cigna Insurance Services (Europe) Ltd [2023] EWHC 1360 (Comm).

The decision usefully re-summarises the principles of contractual interpretation, and considers the current status of the Canada Steamship line of authority in determining whether contractual indemnities should be construed so as to cover acts of negligence. While the court agreed that parties were "unlikely to have agreed to give up a valuable right that it would otherwise have had without clear words", there is no higher threshold in the form of an "inherent improbability" that an indemnity might be intended to cover negligence, and there is no need for an express reference to negligence. On the facts here, the indemnities in question were found to cover negligence.

Background

In 2003, R&SA sold certain insurance operations to Cigna as part of a management buy-out, under a Business Transfer Agreement (BTA). Cigna provided to R&SA and members of the Seller's Group, which at that time included PA(GI), a wide indemnity in relation to potential liabilities concerning those insurance operations.

Cigna was not then an authorised insurer and could not immediately: (a) become the insurer of any master policies which may have transferred or been replaced; or (b) renew any individual policies. Because of this, R&SA and Cigna entered into a Risk Carrying and Underwriting Agreement (RCUA) which addressed how certain matters would be dealt with for an interim period, and a Quota Share Reinsurance Agreement (Reinsurance Agreement) with Munich Re in relation to certain existing and interim exposures.

In 2004, PA(GI) was sold to the Resolution Life Group, meaning it was no longer a member of the BTA Seller's Group. PA(GI) subsequently transferred various parts of its business, including (at Cigna's request) a transfer of its creditor insurance business (comprising only the non-life component of such business) to Groupama in 2006. In connection with this transfer, parties including R&SA and Cigna entered a Deed of Warranty and Indemnity (DWI).

Complaints of mis-selling PPI policies were first made to the Financial Ombudsman Service (FOS) after the DWI. The FOS designated PA(GI) as the correct respondent to the complaints. PA(GI) challenged that designation, but in 2015 the High Court rejected PA(GI)'s argument that the mis-selling liabilities had transferred to Groupama. Following that ruling, the FOS noted that PA(GI) had accepted responsibility and stated that PA(GI) was the correct respondent. Thereafter PA(GI) resolved the complaints, which were ultimately dealt with through a redress scheme.

The key question in these proceedings was whether those redress payments and associated costs and expenses could be passed to Cigna under indemnities in the BTA or DWI.

Cigna raised a number of reasons why they said the liabilities could not be so passed, most importantly:

• the indemnities did not extend to liabilities arising from the negligence of PA(GI) or its agents, in part based on an argument that there was no express reference to negligence in the indemnities, referring to the Canada Steamship line of authority;
• PA(GI) could not rely on the indemnities because it was no longer a member of the Seller's Group;
• the indemnities could only be triggered by actual legal liability and not reasonable settlements.

Decision

The Commercial Court (Dame Clare Moulder DBE) held that PA(GI) could rely on the indemnities, rejecting each of the arguments referred to above.

Contractual interpretation

The judge reiterated the proper approach to construction of contracts as set out by the Supreme Court in Wood v Capita [2017] UKSC 24 (considered here). The key points by way of summary re-cap are:

1. The task is to ascertain the objective meaning of the language the parties have selected, looking at the contract as a whole and giving more or less weight to the wider context depending on the nature, formality and quality of drafting of the contract.
2. Where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense, but in striking a balance between the indications given by the language and the implications of the competing constructions it must consider the quality of the drafting and must be alive to the possibility that one side may have agreed something which with hindsight did not serve its interest.
3. The relative weight to be given to the context will vary according to the circumstances, so textual analysis may be key when the parties are sophisticated and the terms have been negotiated and prepared with the assistance of skilled professionals, but the factual matrix may be more important when contracts are brief and informal. However, even when drafted with professional assistance, the contract may lack clarity and the judge may be helped by considering the factual matrix.

Here, the judge found that the BTA was a professionally drafted contract, which was complex with many interlocking definitions. It was not apparently produced in haste or informally. The clear language must carry considerable weight in these circumstances.

Canada Steamship line of authority

Cigna relied on Canada Steamship Lines Ltd v The King [1952] AC 192, and subsequent cases, to argue that there is an underlying principle based on what is regarded as the "inherent improbability" of one party agreeing to assume liability for another party's wrongdoing, such that clearly expressed words are needed to convince a court that this is what the parties actually intended, and that this principle provides a "useful guide" in ascertaining the objective intentions of the parties.

The judge noted that recent useful clarification could be found in the Supreme Court's judgment in Triple Point Technology v PTT [2021] UKSC 29 (considered here). In that case, Lord Leggatt summarised the "modern view", which is to recognise that commercial parties are free to make their own bargains and allocate risks as they see fit, but that in construing the contract the court starts from the assumption that in the absence of clear words the parties did not intend the contract to derogate from normal rights and obligations (ie the Gilbert-Ash principle). More formulaic approaches such as reflected in Canada Steamship and the contra proferentem rule were "losing their last vestiges of independent authority and being subsumed within the wider Gilbert-Ash principle".

The judge rejected Cigna's arguments based on Canada Steamship. Cigna had put the matter too highly when describing the Canada Steamship principles as guidance and submitting that one should approach the question of contractual interpretation on the basis of what will in general be an "inherent improbability" that the parties should agree to allocate responsibility for one party's wrongdoing to the other.

In fact, the true principle - at least as far as negligence is concerned - is that the court should bear in mind that a party is "unlikely to have agreed to give up a valuable right that it would otherwise have had without clear words". If and to the extent that the words "inherent improbability" suggested a higher threshold, it was not consistent with Triple Point. Moreover, applying Lord Leggatt's approach, there was no need for express words to have been used for the indemnity to extend to negligence.

The PPI mis-selling liabilities were within the scope of the relevant indemnities on their proper interpretation. They fell within the natural meaning of the clauses in question, and PA(GI)'s construction was supported by the other provisions of the contract (and the related RCUA and Reinsurance Agreement), the overall structure of the sale of the business as a going concern (although certain contracts could not be transferred straightaway due to lack of authorisation, hence the arrangements for the interim period provided for in the RCUA), the factual matrix, and business common sense. For example, the judge noted that where the parties intended to exclude liability for negligence this was done expressly but no such wording was used in the indemnity, and it was in the reasonable contemplation of the parties that complaints could be made to the regulator or FOS.

PA(GI) no longer in Seller's Group

The judge held that PA(GI) was not precluded from claiming under the indemnity because it was no longer a member of the relevant corporate group. There was no basis on the language used to conclude that it was intended for the indemnity to be limited (as Cigna contended) to subsidiaries which at the time of the claim were a member of the Seller's Group. The context suggested that there was a deliberate decision in other parts of the contract to make an express qualification in this regard when that was the intention.

Further, business common sense supported the interpretation that the indemnity should benefit the subsidiaries who at the time of the BTA were part of the Seller's Group, whether or not they remained a subsidiary at the time of the loss or claim. PA(GI) could enforce its rights under the indemnity, on its proper construction, under the Contracts (Rights of Third Parties) Act 1999.

Effect of settlements

The judge held that the indemnities extended to an actual liability and a reasonable acceptance of liability (including by way of a reasonable and bona fide settlement of claims/complaints), and extended to payment under the provisions of the Dispute Resolution: Complaints Sourcebook (DISP) in the FCA Handbook.