It Is Not the Law's Role to Improve Bad Bargains
10th May 2017Back to articles
In the context of an insurance company's takeover, the Supreme Court has ruled that sale contracts must be strictly interpreted and that it is no part of the law's function to help either buyer or seller to escape the consequences of a bad bargain.
One motor insurer had bought the entire share capital of another company. The share purchase agreement incorporated a clause that required the seller to indemnify the buyer against any losses arising from complaints or claims of mis-selling of insurance products that were registered with the then Financial Services Authority (FSA), or other public authority, and which related to the period prior to completion of the purchase.
Shortly after the sale went through, the buyer was informed of many instances in which the company's telephone sales personnel had misled customers.
The FSA was informed by both companies of the claims and the buyer sought to rely on the indemnity clause to recover losses arising from those events from the seller.
The buyer's claim was upheld by the High Court, but that ruling was subsequently overturned by the Court of Appeal on the basis that the indemnity was confined to losses arising from claims or complaints made to public authorities. Because the seller and the company had voluntarily informed the FSA, the clause did not apply.
In dismissing the buyer's challenge to that decision, the Supreme Court found that the seller's interpretation of the clause reflected the objective meaning of the contractual language used and was consistent with business common sense.
The share purchase agreement may have been a bad bargain from the buyer's point of view but it was not the role of the courts to improve on the deal that was actually struck.
In the context of company takeovers, the exact meaning of any warranties in the contract for sale and their enforceability need to be carefully considered.
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