What happened?

AXA SA v Genworth Financial International Holdings Inc. [2019] EWHC 3376 (Comm) relates to the acquisition of two insurance businesses. In September 2015, global insurer AXA agreed to acquire (indirectly) the shares in two companies – referred to in the judgment as FICL/FACL – from Genworth.

FICL/FACL had historically provided payment protection insurance (PPI) in relation to store credit cards provided to consumers. When it came to light that there had been wide misselling of PPI products across the industry, FICL/FACL started receiving claims for compensation.

For several years, these claims were reimbursed by the intermediary that had marketed the PPI. But in July 2014 the intermediary halted reimbursement for misselling that had occurred before January 2005, on the basis that marketing PPI products became a regulated activity only from that date.

This left FICL/FACL to fund the compensation for a substantial number of new claims. However, Genworth was expecting the intermediary to enter into a new arrangement that would enable reimbursement to recommence. Genworth informed AXA about this as part of the sale process.

As a result, the parties included a clause in the share sale agreement stating that Genworth would reimburse AXA for 90% of any compensation paid by FICL/FACL after they came under AXA’s control, but that this obligation would expire when the intermediary entered into the new arrangement.

The parties therefore envisaged that the clause would be short-lived, but (in theory) it could last indefinitely if no new arrangement were concluded. In fact, that is what happened. The intermediary never entered into a new arrangement, and the clause did not expire.

What was the dispute?

In October 2017, AXA formally requested payment under the clause from Genworth for a substantial sum. Genworth refused to pay. It said the clause amounted to an indemnity, with two consequences:

• Before claiming payment, FICL/FACL were required to assert all reasonable defences available to them against any PPI claims. This, Genworth said, was because an indemnity is a promise to protect against a loss, and AXA was under a duty to mitigate that loss.
• If Genworth paid out under the payment obligation, it would then be “subrogated” to FICL/FACL, allowing it to counterclaim against the intermediary. (Genworth maintained that the intermediary was still obliged to reimburse FICL/FACL for historic misselling).

In response, AXA said the clause was not an indemnity, but rather a “covenant to pay” (essentially, a debt), meaning that these two consequences did not arise.

What did the court say?

The court agreed with AXA.

The judge was not prepared to attempt to “classify” the clause as either an “indemnity” or some other pre-determined type of obligation, then identify the consequences flowing from that. Instead, he examined the meaning of the clause to decide what its effect was. It was perfectly possible for the clause to be a “bespoke” provision, and not a “classic” example of any familiar contractual provision.

The clause was complex and layered with defined terms, which the judge had to consider. However, he noted that wording of the clause was that Genworth “hereby covenant[s] … that [it] will pay [AXA] … on demand” an amount equal to any losses and costs arising out of PPI misselling. In particular, he emphasised that the clause used the terms pay and on demand, rather than indemnify.

This, he said, indicated that the clause was an “absolute” obligation to pay. It was not merely a promise to protect AXA against any losses suffered. There was no requirement in the share sale agreement for AXA to mitigate any loss or assert any defences.

The clause was therefore more in the nature of a debt than an indemnity. As a result, AXA was under no obligation to assert any defences to PPI claims to claim reimbursement from Genworth, and Genworth was not “subrogated” to FACL/FICL (and so not entitled to claim against the intermediary).

AXA was therefore entitled to recover the full amount claimed.

What does this mean for me?

Where a buyer of a business discovers material historic issues during due diligence, it is typical for it to seek an “indemnity”. This is because, once known, the buyer will not generally be able to sue for breach of the specific warranties in the sale agreement.

This case shows how important it is to ensure that protection is constructed properly. Often a buyer will simply assume that an indemnity will, as with a debt claim, provide “pound for pound” recovery (i.e. that it will not be under a duty to mitigate its loss and will be able to recover all loss, however remote).

But this is not correct. Although the courts will try to understand what exactly the parties to a contract meant by their words, judges have historically (and consistently) said that an “indemnity” is simply a promise to protect another person against loss. It is not a promise to pay a fixed (or, in legal terms, “liquidated”) sum of money. In this sense, the indemnity effectively gives rise to nothing more than a simple claim for damages and may well not result in pound for pound recovery.

When drafting this kind of protection, a buyer should therefore consider the following:

• Phrase the clause as a covenant to pay a sum of money, and not an indemnity against loss. This should increase the chance it will be interpreted as a debt, rather than a damages claim.
• Link the covenant to the underlying matter or event, rather than to a breach of the agreement (for example, a breach of warranty). Again, this will reduce the possibility that the court will regard the covenant as merely providing compensation for contractual damages.
• Consider including a mechanism for calculating the amount payable. This could refer to the amount stated in (for example) invoices, tax assessments or regulatory penalties.
• Make the amount payable on demand. This will help to establish that the payment obligation arises independently of any damage the buyer suffers, again suggesting it is a debt.

Conversely, a seller should consider whether to include any constraints on the protection, including any steps the buyer has to take before claiming reimbursement. In particular, as this case vividly shows, a seller should consider imposing a deadline on any covenant to ensure it is not liable to make payments without limit in time.