Commercial Contracts: Interpreting Indemnity Clauses

Commercial Contracts: Interpreting Indemnity Clauses

Indemnity clauses are commonly incorporated in commercial contracts, and the courts’ approach in interpreting them provides useful clarity for businesses and lawyers.  

The commercial lawyers at top Bahamas law firm ParrisWhittaker are highly experienced in advising business organisations on commercial contract issues including how terms are to be interpreted.

Natural meaning

The parties in a recent case agreed to sell a business, and the share purchase agreement included a clause under which the seller agreed to indemnify the buyer if certain events occurred.  Typically, such indemnities cover, for instance, the costs of any proceedings or claims brought against the company which relate to the time period when the seller was involved with the business.

The buyer made a claim under the indemnity clause.  However, the court decided that the clear words of the agreement meant the indemnity clause did not cover the buyer in the particular circumstances - even though this meant the result was an uncommercial one for the buyer.

The court applied the natural meaning of the contractual words. The ruling continues a trend where the higher courts in the UK are consistently ruling that clear, unambiguous words in a commercial contract should not be overturned simply because it is a bad bargain.

Important factors

The courts take into account various factors when considering such cases where contractual interpretation is at issue, including:

  • What is the aim of the parties, adopting the ‘reasonable person’ test (ie a reasonable person with all the background information reasonably available to the parties at the time the contract was entered into)
  • When clear, unambiguous, ordinary language has been used, the court will usually give effect to that language
  • However, where a clause is ambiguous, the court will interpret it to give it the most commercial sense at the time

An important lesson for commercial organisations is made clear in the ruling itself, with the court noting that: “…businessmen make bad bargains for a variety of reasons (including a weak negotiating position or poor drafting skills), and it is not the court's role to improve a party's bad bargain or to make it more reasonable by rewriting it”.

What does this mean?

Clear, unambiguous contractual wording is vital to minimize the risk of future disputes between the parties. Where there is a dispute, and there is potential ambiguity of the wording in a contract, a court will likely apply a commercial common sense approach to interpret the contract - whatever the end result is likely to be.

How can we help?

Clear, unambiguous contract terms must be negotiated to minimise the risk of future dispute.  If you have any concerns regarding a commercial contract; or you are negotiating contractual terms or you are involved in a dispute with a contractual party, contact the expert commercial lawyers at Bahamas law firm ParrisWhittaker for urgent advice and representation.

1 Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd [2015] EWCA Civ 839