Herbert Smith Freehills succeeds for client in contractual indemnity dispute

International law firm Herbert Smith Freehills has successfully represented its client PA(GI) in a trial of preliminary issues before the Commercial Court concerning the construction of two contractual indemnities given by the defendant, Cigna Insurance Services, in a Business Transfer Agreement and a Deed of Warranty and Indemnity.

The claim by the PA(GI) related to amounts it paid out to customers by way of redress in respect of the mis-selling of payment protection insurance (PPI) policies as well as costs and expenses associated with this redress. The PPI policies were sold to customers between 1991 and 2004 by retailer Next acting as agent for PA(GI) as the insurer. PA(GI) asserted that Cigna had agreed to take on the financial responsibility for PPI liabilities and related costs and expenses under a 2003 business transfer agreement and a 2006 deed of warranty and indemnity, following a management buyout in 2003.

The judgment involved a number of points of interpretation of several contracts and insurance business transfer schemes under Part VII of FSMA.

Dame Clare Moulder DBE rejected Cigna's arguments on the construction of the relevant indemnities, including deciding that the Defendant 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.

The Judge also held that (i) the PPI liabilities were within the scope of the relevant indemnities as properly construed and (ii) 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 DISP sourcebook in the FCA Handbook.

Moreover, PA(GI) was not precluded from claiming under the indemnity because it was no longer a member of the relevant corporate group; PA(GI) could nonetheless claim under the indemnity on its proper construction under the Contracts (Rights of Third Parties) Act 1999.

The Herbert Smith Freehills team comprised Partner Sarah McNally, Senior Associate Tomás Mac Gearailt and Associate Hebe Peck.

A link to our blog post on the judgment can be found here.