Contractual indemnities are an important tool for the allocation of risk in a contract. They may be intended to reflect a party’s ability to insure against (or bear) certain risks. When drafting indemnities in a contract, it is important that the indemnities are clearly drafted to reflect the parties’ intentions.
In PA(GI) Limited v Cigna Insurance Services (Europe) Limited [2023] EWHC 1360 (Comm), the Commercial Court has found in favour of the claimant, PA (GI) Limited (“PAGI”), in a trial of preliminary issues relating to claims for indemnification of payment protection insurance (“PPI”) mis-selling liabilities and related costs under a business transfer agreement and a deed of warranty and indemnity.
In her judgment, the Judge, Dame Clare Moulder DBE, considered recent cases on whether an indemnity applied in the case of the indemnified party’s negligence even where that was not expressly stated in the contract. She found in this case that the indemnities given by Cigna Insurance Services (Europe) Limited (“Cigna”) in the business transfer agreement and in the deed of warranty and indemnity did apply in the case of negligence and/or breach of regulatory/statutory duty even though there was no express mention of negligence.
Background
Under an agreement for the sale and purchase of healthcare insurance operations of Royal & Sun Alliance Insurance plc (“R&SA”) dated 2003 between R&SA (as Seller), Cigna (as Buyer) and another company (the “Agreement”), R&SA sold certain insurance operations to Cigna as part of a management buy-out from R&SA. Cigna provided to R&SA and members of the Seller’s Group, which at that time included PAGI, an indemnity in respect of “Liabilities” (broadly defined as liabilities of the transferring business other than certain specified liabilities), and all “actions, costs, claims, losses, liabilities… in respect thereof”.
In September 2004, PAGI was sold to the Resolution Life Group and ceased to be a subsidiary of R&SA. PAGI subsequently transferred various parts of its business to Groupama Insurance Company Limited in 2006. In connection with this 2006 transfer, various parties, including R&SA and Cigna entered into a Deed of Warranty and Indemnity dated 31 May 2006 (the “Deed”).
Complaints of mis-selling in respect of PPI were first made to the Financial Ombudsman Service (“FOS”) after the Deed was entered into in 2006. The FOS designated PAGI as the correct respondent to certain PPI mis-selling complaints.
The general principles of contract interpretation
Before considering whether the indemnities in this case extended to claims and liabilities for PPI mis-selling, the Judge helpfully summarised the well-known general principles of contract interpretation derived from the Supreme Court’s judgment in Wood v Capita Insurance [2017] UKSC 24 which also considered some previous cases including the Rainy Sky1 case:
- The court’s task is to ascertain the objective meaning of the language which the parties have used in the contract. The court must consider the contract as a whole, and depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning.
- Where the language in the contract is unambiguous, the court must apply it. Where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction of the language is more consistent with business common sense.
- The court must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest.
Has the law moved on from the Canada Steamship principles?
Relying on Canada Steamship Lines Ltd v The King [1952] AC 1922 and subsequent cases, Cigna argued that there was an “inherent improbability” of one party agreeing to assume liability for another party’s wrongdoing without clear words being used. Cigna argued that the indemnities did not apply in the case of PAGI’s negligence as that was not expressly stated.
PAGI submitted that the more recent Supreme Court authority indicates that the law has “moved on” from the Canada Steamship principles.
In the Supreme Court’s decision in Triple Point Technology Inc v PTT Public Co Ltd [2021] UKSC 29, Lord Leggatt acknowledged in his judgment that commercial parties are free to make their own bargains and allocate risks as they think fit and the task of the court is to interpret the words used fairly applying the ordinary methods of contract interpretation. He stated that “Although its strength will vary according to the circumstances of the case, the court in construing the contract starts from the assumption that in the absence of clear words the parties did not intend the contract to derogate from these normal rights and obligations…”
Citing previous authority, Lord Leggatt restated the principles that (i) a party is unlikely to be held to have agreed to give up a valuable right that it would otherwise have had without clear words; and (ii) the more valuable the right, the clearer the language would need to be be.
PAGI submitted that the word “negligence” does not have to be used expressly and referred to the court’s judgment in Cape Distribution Ltd v Cape Intermediate Holdings [2016] EWHC 1119 (QB) where the Judge considered, on the facts of that case, that the words “entitled to be indemnified accordingly” are words which, widely expressed as they are, should in that case be understood as covering an indemnity in the case of the claimant’s negligence even though the indemnity did not expressly mention negligence.
The Judge held that liabilities for PPI mis-selling (save as regards the life element of the liabilities) were within the scope of the relevant indemnities in the Agreement other than where such liabilities arose as a result of fraud or dishonesty (including deceit) on the part of the agent such that the indemnity was held to apply in the case of negligence and/or breach of regulatory/statutory duty. In reaching her decision, the Judge considered the indemnity language, business common sense and the factual context, including the overall structure of the sale of the businesses as a going concern.
Other points
In the judgment, the Judge also found that:
(a) the indemnity in the Agreement given to the Seller’s Group extended to PAGI as it was a subsidiary of the Seller and a member of the Seller’s Group at the time of the Agreement.
The definition of the Seller’s Group in the Agreement included: (i) the Seller: (ii) its subsidiary undertakings; (iii) its holdings companies “as at the date of the Agreement” and (iv) the subsidiary undertakings “from time to time” of such holding companies. The Judge found that the language in (ii) was not just limited to subsidiaries of the Seller at the time of the claim.
(b) the indemnity in the Agreement extended to:
(i) an actual liability as well as a reasonable and bona fide settlement of claims in respect of the Liabilities; and
(ii) payment under the provisions of the FCA handbook (assuming it was a reasonable and bona fide settlement) whether or not there was a complaint to the FOS.
The language of the indemnity applied also to “actions, costs, claims, losses, liabilities, proceedings or expenses” incurred “in respect of” the Liabilities (defined as the Liabilities of the Business). The Judge found that the indemnity expressly contemplates not just liabilities which are established or found to exist at law but amounts incurred as a result of actions or claims being brought, whether or not they result in a finding of legal liability. The Judge also noted that the term “claims” and “proceedings” are not limited to claims made to, or proceedings before, a court.
(c) the indemnities in the Deed applied to liabilities in respect of PPI mis-selling other than where such liabilities arose as a result of fraud or dishonesty (including deceit) on the part of the agent. The Judge noted that the indemnities in the Deed were extremely broad and it is not necessary for an express reference to negligence or breach of statutory duty for PPI mis-selling to be caught.
The Judge found that the indemnities in the Deed which applied also to “any and all costs, claims, damages, liabilities and expenses of whatsoever nature arising out of or in connection with … the Creditor Business” extended to an actual liability for PPI mis-selling and also to a reasonable acceptance of liability (including by way of a reasonable and bona fide settlement of claims/complaints) and to redress under the provisions of the FCA handbook.
Comment
This case re-iterates the importance for clear drafting of indemnities in the contract so that the language clearly reflects the parties’ intention. There was no need for express words to have been used for the indemnities to apply in the case of negligence or breach of regulatory/statutory duty but a party is “unlikely to have agreed to give up a valuable right that it would otherwise have had without clear words.”
An express statement in the contract as to whether or not an indemnity applies regardless of negligence or breach of duty (statutory or otherwise) would avoid the scope for argument on this point and in our view it remains good practice to reflect expressly the intention of the parties.
Further reading
For a detailed discussion on contractual indemnities in the specific context of operational energy contracts, please refer to Haynes Boone’s paper “Knocking at an open door: The English law approach to mutual indemnities in the offshore oil and gas sector” by Glenn Kangisser (Partner), Teena Grewal (Counsel) and Mette Duffy (Associate) which also includes, among other things, a discussion of the principles in the Canada Steamship case.
Postscript: Permission to appeal was sought in respect of the Commercial Court’s decision. However, permission was refused on paper on 17 October 2023 and as a result the Commercial Court’s judgment stands.
1 Rainy Sky SA & others v Kookmin Bank [2011] UKSC 50
2 Please refer to Haynes Boone’s paper “Knocking at an open door: The English law approach to mutual indemnities in the offshore oil and gas sector” by Glenn Kangisser (Partner), Teena Grewal (Counsel) and Mette Duffy (Associate) which also includes, amongst other things, a discussion of the principles in the Canada Steamship case.
3 In the instant case, the Judge noted that in her view the principle (at least in relation to negligence) 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” and if and to the extent the words “inherent improbability” suggest a higher threshold, that is not consistent with Triple Point.