Interpreting Indemnity Clauses can be In-Tense

Written by Barri Mendelsohn

April 2020 saw the UK courts consider the drafting of indemnity clauses and, in particular, whether an indemnity clause would apply to damage that occurred prior to a sale and purchase agreement between parties was signed. Ultimately, the key points in determining whether the indemnity applied were the tense of the verb used in the indemnity, as well as the placement of the clause within the agreement, specific and general treatment of warranties and limitations on claims and the wider context of the SPA.

For further details we set out below a summary of the facts and issues considered by Lord Justice Phillips in Gwynt y Môr OFTO Plc v Gywnt y Môr Offshore Wind Farm Limited and ors [2020] EWHC 850 (Comm).

Facts

On 11 February 2015, Gwynt Môr OFTO plc (the “Claimant”) entered into a sale and purchase agreement with Gwynt Môr Offshore Wind Farm Ltd (with others, the “Defendants”) (the “SPA”) to purchase the business of owning, maintaining and operating the electrical transmission link between the Gwynt y Môr wind farm situated off the North Wales coast (the “Wind Farm”) and the National Grid (the “Transfer”). The assets involved in the Transfer included four subsea export cables (the “Cables”). The Transfer completed on 17 February 2015.

Within seven months of the Transfer completing and title in the Assets passing to the Claimant, two of the four Cables failed (with one failing only 2 weeks after completion) – and the Claimant undertook urgent repairs to the tune of £15 million. During the repair works, the Claimant discovered that sections of the two Cables that had failed had corroded over the previous months, or years, being damage sustained prior to completion of the Transfer.

The Claimant claimed the reinstatement costs of £15 million from the Defendants, relying on an indemnity that was set out in clause 8.2 of the SPA pursuant to which the Defendants agreed to indemnify the Claimant against the full cost of reinstatement of any Assets that are destroyed or damaged prior to Completion (“Pre-Completion Damage”) (the “Indemnity”).

The Claimant argued that “Pre-Completion Damage” related to any damage or destruction occurring at any point prior to Completion and consequently applied to the damage to the Cables. The Defendants denied that the Indemnity covered the costs of repairing the Cables, arguing instead (among other things) that the Indemnity applied if and only if damage occurs in the period between signing and completion.

Judgement

The Commercial Court held that the Indemnity did not include the costs of repairing the Cables. In making this decision, the Court first considered the specific wording of the Indemnity, paying particular attention to the tense used in order to determine whether, in the absence of a starting point for the Indemnity, it would apply to damage which occurred before the SPA was signed. The Court held that the use of the tense “are destroyed or damaged” excludes the Indemnity from encompassing any damage that has occurred prior to signing the SPA as the tense specifically means that damage has yet to occur. Had the Indemnity intended to include any damage occurring before signing of the SPA, the wording which should have been used was “have been destroyed or damaged”.

The Court also considered the Indemnity in the context of the surrounding clauses. Clause 8.1 related to the execution of the SPA and clause 9 related to completion of the SPA. Given the placement of the Indemnity at clause 8.2 which was between the clauses dealing with the execution and completion of the SPA, the Court stated that it is readily understood that Pre-Completion Damage defined in the Indemnity referred to damage occurring between signing and completion of the SPA.

Importantly, a specific warranty relating to the absence of damage to the Assets as at the date of the SPA (the “Warranty”) was also considered by the Court. The Warranty was limited to what (i) had been discovered; and (ii) was reasonably likely to cause disruption to the “Offshore Transmission System”, a section of the Wind Farm. Limitations of liability included within the SPA provided that the Defendants’ liability only arose in certain circumstances.

The Court found that the carefully structured and limited provisions would have been rendered pointless and would give no protection to the Defendants if there was a broad indemnity against any and all damage suffered prior to signing of the SPA.

Given these drafting points, the Court found that the Indemnity did not include damage caused prior to signing of the SPA and as a result the Defendants were not liable to pay for the repairs.

Key takeaway

It is important when drafting an indemnity to consider carefully the language used and the intention of the parties as to the period over which claims may be brought. This case shows that, even where an express period is not included in the indemnity, the Courts may find that an indemnity is restricted by virtue of the SPA drafting and wider context.

When considering an indemnity, the Courts will take into consideration (among other things) the tense of verbs used within the clause, the placement of the clause within the operative agreement, specific and general treatment of warranties and limitations on claims and other clauses set out in that agreement.