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Defending W&I claims: strategic themes illustrated in Finsbury Foods v Axis & Ors

Daniel Shapiro KC, Caroline McColgan and Hamish Fraser acted for the successful Insurers in Finsbury Foods Plc v Axis Corporate Capital Ltd & Ors [2023] EWHC 1559 (Comm).  Although every warranty and indemnity (“W&I”) is different, here they discuss the strategic themes which generally arise in defending W&I claims, illustrating those themes with examples from Finsbury Foods.


The warranty and indemnity (“W&I”) insurance market has thrived.  There is a widespread recognition of the value of W&I insurance in the M&A community: W&I insurance provides a buyer who wants the sellers of a company to carry on working in the company with protection for an inadvertent breach of warranty by the sellers without affecting the working arrangements with the sellers.  Even with a fair presentation of the risk by the buyer and careful inquiry by insurers, there is likely to be a significant information asymmetry and, after purchase, in the event of a claim there is then the situation that all the documents, knowledge and detailed understanding of the company are with the buyer presenting the claim to the insurers.  How then are insurers to identify the valid claim from a speculative or, even, a contrived claim?  If insurers decide the claim is invalid then how is the claim best to be defended?  We offer some pointers on the general strategic approach which might be taken, by reference to the recent decision in Finsbury Foods Plc v Axis Corporate Capital Ltd & Ors [2023] EWHC 1559 (Comm).

In Finsbury Foods, the Claimant (“Finsbury”) obtained a W&I policy in respect of Finsbury’s acquisition of a specialist gluten-free bakery known as Ultrapharm Limited (“Ultrapharm”orthe “Company”).  Finsbury had a special interest in acquiring Ultrapharm, as Ultrapharm provided Finsbury with the opportunity to enter the gluten-free market as Ultrapharm had the recipes and the specialist know-how required to succeed in that sector.  However, the Sellers were reluctant to sell the Company.  Ultrapharm was a family business that the CEO, Marc Lewis, had built up over many years.  It was owned by him and his parents, and employed his brother.  Finsbury made an off-market approach to Mr Lewis, and agreed to pay the price (£20million) which Mr Lewis required to sell Ultrapharm, which price Finsbury had proposed or justified because it was roughly 1x Ultrapharm’s net sales.

Finsbury brought a claim on the basis that after the deal completed, it discovered the effects of price reductions and a recipe change that Mr Lewis had agreed with Ultrapharm’s biggest customer, Marks & Spencer, and implemented during the Warranty Period before the sale of the Company completed.  Finsbury admitted that one of the members of its Transaction Team had been told about the fact of the price reductions before Completion, but alleged that he had been misled as to the effect of the price reductions and led to believe they would be profit neutral.  Finsbury complained it had had no warning of the recipe change at all. Finsbury complained that these effects breached a “price reductions warranty” and a “trading conditions”/material adverse change warranty in the share purchase agreement (“SPA”) by which it acquired the Company.  Finsbury claimed more than £3million from Insurers as the alleged difference between the “warranty true” value of the Company and the “warranty false” value.  These values were arrived at applying a traditional EBITDA * multiplier calculation, as Finsbury insisted that was the true basis on which it had valued the Company.

Insurers refused any indemnity and vigorously defended the claim, considering that it was a contrived claim. The information that insurers had from the outset, and their analysis of the company all suggested that Finsbury paid the £20m price because that was the price necessary to buy the Company and that was what it was worth to them.  There was no breach of warranty or that, insofar as there was, then Finsbury knew the relevant information.  As the matter proceeded information and disclosure was extracted from Finsbury which not only confirmed that but revealed that, for example, the recipe change had been effected prior to the Warranty Period (so that it could not be in breach of warranty).  Even then it turned out that documents had been withheld.  On the morning of the first day of trial Finsbury produced four further relevant emails.  Investigations then showed there were further undisclosed but relevant emails.  The result was that the trial was adjourned, at Finsbury’s expense, for two weeks, for Finsbury to redo its disclosure process.  That then produced further documents which confirmed Insurers were correct in their position on all the issues.  Having heard the evidence when the trial resumed, Lionel Persey KC, sitting as a Deputy Commercial Court Judge, found for Insurers on every issue.  His judgment illustrates some of the strategy as to defending W&I claims.

First, Insurers need to develop a real understanding of the target company, and the business interests of the buyer, without making assumptions.  That requires the legal team really to understand the particular business and the motivations of the buyer and seller, and may require early engagement with expert accountants. Although, typically, a company is valued (at least in part) on a multiplier of EBITDA (“MoE”) basis, that was not how Finsbury valued Ultrapharm.  All the MoE valuations were retrospective and reverse engineered.  Finsbury adopted a less typical multiplier of revenue (“MoR”) valuation because that justified the £20m price that was the headline price required.  Without a full understanding of the real value of the Company being in the recipes and know-how, Insurers might have simply accepted Finsbury’s contentions about MoE values.  Similarly, although the recipes were of significant value, the understanding that those recipes developed over time in the normal course of the business was vital to identifying whether there was a breach of warranty as a result of such a claim.

Second, Insurers should consider the construction of the warranty or warranties which are alleged to have been breached, and then consider whether, properly construed, there was any breach of warranty.  Just because the claimant alleges a breach of warranty does not mean there is in fact a breach of warranty. In Finsbury, on a proper construction of the warranties, there was no breach because (1) both the price reductions and the recipe change had been agreed before the accounts date stated in the SPA, and disclosure then revealed the recipe change had also been implemented before the accounts date, whereas the warranties applied only to events which occurred “since the accounts date” in the Warranty Period; (2) for the purposes of the Trading Conditions Warranty, neither the price reductions nor the recipe change had had a sufficiently “material” effect on the Company’s business to trigger the warranty.

Third, Insurers should make use of knowledge exclusions, recognising that at the point of refusing the claim or pleading the Defence, one might have to infer knowledge subject to obtaining further evidence on disclosure.  In Finsbury, the Judge found that, if there had been a breach of the Price Reductions Warranty, Finsbury’s knowledge of the price reductions would have been sufficient to trigger the “Knowledge Exclusion” in the Policy.  The Knowledge Exclusion was of a fairly typical form, requiring a member of the buyer’s transaction team to have “Actual Knowledge” of the breach that is alleged to give rise to the loss.  “Actual Knowledge” was defined to exclude constructive or imputed knowledge, but Finsbury accepted it would nonetheless include Nelsonian knowledge.  Finsbury asserted that it had not known about the effect of the price reductions, but this evidence was rejected as being wholly inconsistent with the contemporaneous documents.  Insurers succeeded in their arguments that Finsbury had Actual Knowledge of the relevant breach even though there was no direct evidence, prior to trial, to prove that that was the case.

Fourth, causation is likely to be key.  Depending on the facts of the transaction, and the underlying motivations of buyer and seller, it may well be that the buyer would have proceeded in any event so that there is no causation.  Since the typical measure of loss is the difference between the “warranty true”/as-warranted value of the Company and the “warranty-false” value (South Australia Asset Management Corporation v York Montague [1997] AC 191 Lord Hoffman at [216]), it is often assumed that if breach is proved, the Claimant will be entitled to recover that amount.  However, the buyer is still required to establish that they would not have purchased the company for the same sum in any event.  Finsbury illustrates that buyers may not have been put off a transaction by knowledge of the alleged breach of warranty.  This may be the case if the buyer has a special interest in acquiring the company and/or if the seller is particularly unwilling to sell, and has to be incentivised by a high price.  This was the case in Finsbury.  The documentary evidence showed that Ultrapharm’s EBITDA had fallen over the course of the negotiations, yet the price that Finsbury had offered to pay the sellers never changed.  Finsbury’s primary concern was not the financial merit of the transaction; it paid the price it paid because it wanted the Company, and that was the price the sellers required.

Fifth, contemporaneous evidence as to the value attributed to the company is likely to be particularly important.  In Finsbury, the Judge found it difficult to assess the EBITDA of the company by reference to comparators identified by the respective expert accountants in their reports, but instead adopted the EBITDA multiplier which the seller’s advisors had proposed prior to the sale.  The due diligence and advisory reports on the transaction provide a valuable source of information in support of valuations.

Sixth, securing adequate disclosure is essential.  W&I insurers are at a disadvantage, because the only documents they will have available to them are those which the Insured has chosen to provide at the underwriting stage.  This will frequently be limited to the due diligence materials. Insurers are unlikely to have the wider transactional documents available to them, including – importantly – those demonstrating how the purchase price for the company was negotiated.  Accordingly, it is likely to be crucial for Insurers to obtain comprehensive disclosure during the course of the proceedings.  Finsbury’s disclosure was inadequate throughout, despite more than 20 tranches of disclosure being provided. Although those tranches had provided Insurers with enough documents to succeed at trial in any event, ultimately the disclosure position was only resolved by a repeat of the disclosure exercise after the commencement of trial.  That yielded some 2000 further documents, leading to an adjournment, and an order that Finsbury pay Insurers’ costs of dealing with the additional disclosure on the indemnity basis.   In Finsbury the Judge observed that it was fortunate that the Court was able to accommodate the additional trial time which was what saved Finsbury from its claim being struck out (with the likelihood of unsatisfactory consequential derivative claims).

Finally, Finsbury stands as testament to Insurers’ determination to defend an unmeritorious claim through to trial.  Insurers were unwilling to settle a claim which they considered to be contrived, and were prepared to fight that claim to trial notwithstanding litigation risk. The eventual downside cost is limited by an order for indemnity costs, but there will, of course, be some irrecoverable costs and insurers took the litigation risk on themselves.  That is, however, essential if Insurers are to defend and, therefore, discourage unmeritorious claims.


Daniel Shapiro KC, Caroline McColgan and Hamish Fraser were instructed by Kirsty Hick, Rebecca Bailey, Julian Bubb-Humfryes, and James Woodward at DAC Beachcroft LLP.

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