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Limelight 08/23

No dough for policyholder: UK court finds that buyer-side W&I policy does not respond to purchaser’s claim

In the recent decision of Finsbury Foods Plc v Axis Corporate Capital Ltd & Ors,[1] the English and Welsh Commercial Court dismissed a policyholder’s claim under a buyer-side warranty & indemnity insurance policy issued in connection with the acquisition of a manufacturer of gluten free baked goods.

Ultimately, the dismissal was due to a failure of the insured to establish breach of an insured warranty, causation and loss. There are a number of key takeaways from the case, including the interpretation of “material adverse change” in the context of an insured warranty; the interpretation of exceptions and exclusions that turn on actual knowledge of deal team members; and loss valuation methodology.

The decision may provide guidance to the assessment of claims in Australia in circumstances where there are very few local warranty & indemnity insurance coverage decisions.  We examine the decision below.


This case involved a claim by Finsbury Food Group Plc (insured) against the underwriters of a buyer-side warranty & indemnity insurance policy (Policy).

The Policy was issued on 31 August 2018 in connection with the purchase of Ultrapharm by the insured pursuant to a sale and purchase agreement (SPA). Ultrapharm was a specialist manufacturer of gluten free baked goods and its largest customer was major high-street retailer, Marks & Spencer.  Subject to its terms, the policy indemnified the insured against the sellers’ liability under the SPA for, amongst other things, breaches of insured warranties.

The insured claimed that Ultrapharm failed to disclose a recipe change and key price reductions between Ultrapharm and Marks & Spencer that amounted to breaches of insured warranties furnished in the SPA that:

  • there had been no material adverse change in the trading position of Ultrapharm since the accounts date, being 31 December 2017 (trading conditions warranty); and
  • confirmed that, since the accounts date, there were no agreed price reductions or discounts which would materially affect Ultrapharm’s profitability (price reduction warranty)

As to the trading conditions warranty, the insured asserted the recipe change was materially adverse because it had a 14% or 9.5% impact on the profitability of the two products affected by the change.

As to both warranties, it was asserted that price reductions offered to Marks & Spencer could be a basis on which they were both breached.

The insured warranties were subject to a “knowledge exception” under the SPA. There was also a “knowledge exclusion” in the Policy.  These provisions broadly had the effect of excluding, respectively, the liability of the seller under the SPA and any cover under the Policy, if certain identified members of the insured’s deal team had actual knowledge of the circumstances of the relevant warranty claim.

Underwriters declined cover on the stated grounds that the insured had not established breach of either of the insured warranties; that both the knowledge exception and knowledge exclusion applied; and that the insured had not in any event established that the claimed breaches had caused any covered loss.

In respect of their position on the knowledge exception and knowledge exclusion, underwriters alleged that certain members of the insured’s transaction team had knowledge of the relevant price reductions before the SPA was entered into as the reductions had been disclosed to the transaction team during the due diligence process. The insured sued the underwriters for cover.


The Court dismissed the claim, upholding the declinature on the basis that neither of the insured warranties had been breached that the knowledge exception under the SPA applied, and that the insured had not established causation and loss, both being necessary elements of establishing the sellers’ liability for the purpose of the insuring clause of the policy.

Trading conditions warranty

The Court considered that there was no breach of the trading conditions warranty because the recipe change was:

  • agreed and took effect before the accounts date;
  • part of the ordinary course of a bakery’s business and did not, without more, fall within the ambit of the trading conditions warranty; and
  • not a material adverse change.

In determining whether the recipe change constituted a “material adverse change” in relation to the trading position of Ultrapharm, the Court observed that the authorities did not provide any set meaning to those words.  Instead, the authorities supported the view that the words meant something that was “substantial or significant” as opposed to something of a “de minimis” level.

In applying its reasoning, the Court rejected the insured’s arguments that the change was materially adverse due to the stated impact on the profitability of two products.  The Court found that, in this case, a “material adverse change” required the total group sales of Ultrapharm to be impacted adversely by more than 10% to constitute a breach of the trading conditions warranty.

As to the price reductions offered to Marks & Spencer, the Court found that “applying commercial common sense” to the construction of the SPA showed that those reductions had been treated separately by the parties and that they had applied specific and separate criteria in order to evaluate whether there had been a breach of the price reduction warranty.  Accordingly, the price reductions could not be relied upon to establish a breach of the trading conditions warranty.

Price reduction warranty

The Court considered that there was no breach to the price reduction warranty because:

  • on its proper interpretation, the price reduction warranty was concerned with price reductions that were offered or agreed to be offered after the accounts date; and
  • on the evidence, the price reductions were offered by Ultrapharm to Marks & Spencer before the accounts date and therefore did not breach the price reduction warranty.

Knowledge exception and exclusion

Both the knowledge exception and knowledge exclusion were capable of applying. However, as the knowledge exception was a term of the SPA, the insured bore the onus of establishing that it did not apply for the purpose of proving that the insuring clause in the policy was triggered.  In contrast, underwriters bore the onus of establishing that the knowledge exclusion in the policy applied.

Ultimately, the Court found that the knowledge exception applied because:

  • during meetings prior to the SPA being entered into, a member of the transaction team specifically asked if there had been any price reductions. He was informed that there had been price reductions; and
  • the transaction team member was provided with pricing data showing the price reductions. He then used the data to prepare a presentation which included a discussion of the impact of the price reductions.

In support of its findings, the Court found that the evidence provided by some of the insured’s witnesses (including the relevant transaction team member) was untruthful because, among other things, it was inconsistent with the contemporaneous documents.


Even if there was a breach, the insured would not have been entitled to damages because it did not establish that any such breach would have caused it loss. The Court found that causation was not established because the insured would have proceeded with the SPA at the agreed price of £20 million even if it had known of the alleged breaches before entering the SPA for its own strategic commercial reasons.

Valuation evidence

As the insured’s claim had failed on both liability and causation, the Court dealt only briefly with quantum.

As to the value of Ultrapharm “as warranted” at the date of the SPA , while the insured had assessed the value of Ultrapharm on a 1 x sales basis and treated the purchase price as fixed at GBP20 million, the Court noted that the conventional way to value Ultrapharm was by taking a conventional run-rate EBITDA multiplied by an appropriate multiple.

Despite the parties calling their own expert witnesses, for the purpose of determining the “as warranted” value of Ultrapharm, the Court adopted the EBITDA derived from the analysis of the investment consultants engaged by the insured immediately before the purchase of Ultrapharm.  It also identified and adopted the average of the multipliers used contemporaneously by advisors to the transaction.  This produced a valuation of approximately GBP15 million to GBP17 million.

In determining the value of Ultrapharm if the warranties had not been breached as alleged, the Court found that the actual value of Ultrapharm (as assessed by the insured’s expert) was within the range of what had been warranted in any event.

The Court also observed that, even if the insured had suffered a loss, it would have been minded to assess the loss on a different basis than that claimed by the insured.  The Court would have adopted the purchase price based on the method on which the insured valued Ultrapharm (being 1x sales) and reduced that price by the amount of reduction in sales, which would have produced a reduction of GBP300,000 in the purchase price.

Key takeaways

There are a number of key takeaways from this case that are potentially relevant for the assessment of W&I claims in Australia.

The case demonstrates that assessment of whether there is a breach of an insured warranty requires the interpretation of the provisions of the underlying transaction document as a whole, consistent with accepted principles of contract interpretation.  In this case, the terms of the trading conditions warranty were read alongside of the price reduction warranty to identify the subject matter and objective purpose of each warranty for the purpose of determining whether there had been a breach.

The decision highlights that the meaning of “material adverse change” in the context of an insured warranty will require consideration of the precise facts and circumstances of the target business and an assessment of the level of change that has occurred against the business (in this case, at a group level).  What is ‘material’ may change from business to business.

Exceptions from liability or exclusions of cover that turn on actual knowledge impose a high evidentiary burden.  Relying on such provisions may require insurers to closely consider contemporaneous documents and thoroughly investigate the due diligence process to determine what was actually known by certain natural persons at the relevant times.  In this case, demonstrating actual knowledge required the Court to reject the evidence of some of the insured’s lay witnesses as untruthful.  Predicting a finding on credibility of this nature can be difficult at the time when an insurer is assessing a claim advanced on a W&I policy.

The valuation analysis and advice obtained for the purpose of the transaction may be relevant when a Court considers the value of any claim advanced on a W&I policy.  In this case, contemporaneous valuation analysis and advice was given significant weight by the Court in arriving at decision on quantum (including with respect to the appropriate multipliers and the assessment of EBITDA).  The weight given to contemporaneous valuation analysis and advice may be of assistance when assessing and adjusting a claim advanced on a warranty.

[1] [2023] EWHC 1559 (Comm)


This publication constitutes a summary of the information of the subject matter covered. This information is not intended to be nor should it be relied upon as legal or any other type of professional advice. For further information in relation to this subject matter please contact the author.