This case concerned a dispute over whether PA (GI) Ltd (PAGI) was entitled to claim under an indemnity for PPI liabilities contained in a Business Transfer Agreement (BTA) and Deed of Warranty and Indemnity (DWI) agreed with Cigna Insurance Services (Europe) Limited (Cigna). It is a reminder, when preparing documents relating to a business transfer, to carry out proper due diligence on the intent and effect of the contracts in relation to previous transactions. It is also another cautionary tale that where contracts are drafted by skilled professionals, the courts will give considerable weight to the language used and will not re-write contracts simply because in hindsight a party entered into a bad bargain.
Background
The background to the matter is a series of restructurings that took place in relation to PAGI’s life and non-life business over a number of years. PAGI was an RSA subsidiary.
- In 2003, RSA sold certain insurance operations in relation to creditor insurance and certain other products to Cigna as part of a management buyout. At the same time, the BTA was entered into between RSA, Cigna and FirstAssist Group Ltd.
- Subsequently, in 2004, PAGI was sold by RSA to Resolution Life Ltd, which became PAGI’s immediate parent.
- In 2005 PAGI’s life insurance business was the subject of a Part VII transfer to a company that became known as Phoenix Life Ltd.
- In 2006, PAGI’s creditor insurance business was the subject of a Part VII transfer to Groupama. At that time, RSA, Cigna and First Assist Group Limited entered into the DWI.
- Finally, in 2011 another Part VII transfer took place from PAGI to RSA.
PAGI had been the insurer under certain payment protection insurance (PPI) policies sold by a high street retailer from 1991 – 2004. The PPI policies were the subject of complaints of mis-selling to the Financial Ombudsman Service (FOS) which were made after the DWI was entered into. PAGI contended in previous litigation that the liabilities for mis-selling had transferred to Groupama under the 2006 Part VII transfer, but the High Court found, in a judgment of Andrews J in 2015, that this was not the case and they remained with PAGI 2.
Claim
PAGI sought an indemnity from Cigna under the BTA and/or DWI for redress it had paid to customers following the PPI mis-selling complaints described above.
As a result, it was necessary for the court to consider the documentation relating to the various transactions and transfers outlined above, and their effect.
Judgment
The BTA
The judge, Dame Clare Moulder DBE, addressed the legal principles of contractual construction. PAGI sought to argue that as the contracts had been drafted by skilled professionals, the court should favour the textual analysis approach to contractual interpretation, and should acknowledge that a party may have agreed to something which with hindsight did not serve its interest.
Cigna stressed the need to consider the factual matrix surrounding the contracts and submitted that the principle from Canada Steamship3, that there is an “inherent improbability” of one party agreeing to assume liability for another party’s wrongdoing, should be treated as a useful guide to construction. Cigna contended that clear words would be needed for one party to have agreed to assume responsibility for the negligence of another.
Moulder J stated that, following the Supreme Court’s decision in Triple Point4, Cigna set the bar too high when describing the Canada Steamship principles as guidance. Instead, Moulder J held that the correct principle 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 without clear words”. Furthermore, it was clear from Lord Leggatt’s judgment in Triple Point that it is not necessary for express words to be used to exclude negligence.
The indemnity clause in the BTA stated: “ The Buyer shall: (a) assume liability for and indemnify and keep indemnified the Seller or any other member of the Seller’s Group against the payment or performance of the Liabilities…and any and all actions, costs, claims, losses, liabilities, proceedings or expenses (including reasonable legal expenses) which the Seller (or other member of the Seller’s Group) may suffer or incur in respect thereof”.
“Liabilities” was defined as “ all liabilities of the Business (but excludes the Excluded Liabilities) and “Liability” shall mean any one of them”.
Moulder J held that the language of the indemnity was broad enough to capture liabilities for mis-selling as the indemnity extended to “all liabilities” of the Business. This construction was more consistent with business common sense and was supported by other provisions of the BTA which reflected that the whole of PAGI’s business was transferred as a going concern. It was also supported by other documents relating to the transaction, including a reinsurance agreement that provided for reinsurance and indemnity of the seller during an interim period.
The judge rejected arguments that it was inherently unlikely that Cigna would assume responsibility for negligence by PAGI or its agent in the absence of clear wording. However, the judge accepted that the language would not extend to any fraud or dishonesty (although it does not appear that any was alleged).
It was also deemed important that Cigna could have included an exclusion expressly excluding liability for mis-selling, and had not done so, and that it was in the reasonable contemplation of the parties that complaints could be made to the regulator and/or the FOS.
Effect of 2004 transaction
The judge found that it did not matter that PAGI ceased to be a member of the seller’s group in 2004 when it was acquired by Resolution Life. The language of the BTA made clear the indemnities extended to the company “ at the date of the agreement”. Language used elsewhere in the agreement demonstrated that the parties had in mind that the composition of the group might change over time, and the parties could have limited the operation of the indemnity if they wished to do so. This interpretation also made commercial common sense, as it was the subsidiary undertakings at the time of sale that would need continuing indemnity against past liabilities.
Extent of the indemnity
The judge was also asked to decide whether the definition of liabilities within the BTA meant liabilities as a matter of law, or whether it also extended to reasonable and bona fide settlement of claims, and whether it extended to payments under the provisions of the DISP sourcebook in the FCA Handbook.
In Moulder J’s view, the language of the indemnity was broad and was not restricted to legal liability established in the courts, but would encompass a reasonable and bona fide settlement of claims and complaints. The judge again placed importance on the fact the contract was professionally drafted, and as such, the language of the scope of the indemnity should be given weight.
Favourably for PAGI, it was held the indemnity extended to payments under the provisions of the DISP sourcebook in the FCA Handbook, even in circumstances where PAGI had made payments to customers in the absence of complaints, if payments were made in recognition of PAGI’s obligations as a regulated entity. It was held that the word “claims” was capable of encompassing complaints. PAGI’s case was always that if it had not offered redress there would have been complaints to the regulator.
Accordingly, PAGI was entitled to be indemnified from Cigna for claims and compensation paid out in respect of PPI mis-selling, pursuant to the BTA.
The subsequent transfers
Moulder J found that the 2005 scheme transferred from PAGI to Phoenix the mis-selling liabilities attributable to the life business or the life element of composite policies, and the rights to claim under the BTA indemnity also transferred in respect of these elements. Whilst the FOS had been correct to decide that PAGI was the appropriate respondent to complaints about PPI relating to the general business of PAGI following Andrews J’s judgment on the 2006 scheme, PAGI should have raised the 2005 scheme with the FCA and FOS and should not have paid out without having done so. Therefore, any settlement relating to the mis-selling of life policies or life component of composite policies was not reasonable and PAGI was not entitled to recover those amounts under the BTA.
The 2011 scheme did not transfer from PAGI to RSA any entitlement to bring a claim under the BTA or transfer the PPI liabilities.
The DWI
Turning to the DWI, this was confined to matters relating to creditor business and not life or the underwriting of general insurance contracts. The indemnity within it was extremely broad as it referred to “ any and all costs, claims, damages, liabilities and expenses of whatsoever nature arising out of or in connection with…the Creditor Business” and the mis-selling liabilities were capable of falling within it. The parties were aware of the potential for mis-selling claims as this had been addressed in the Groupama contract.
Conclusion
This case highlights the court’s reluctance to interfere with contractual wording where contracts have been professionally drafted by skilled lawyers. This judgment re-iterates the importance for any party acquiring a portfolio of insurance business that they think carefully about what liabilities they could potentially be exposed to and to ensure the contract is carefully drafted expressly to exclude any liabilities they do not wish to be responsible for.
