Finsbury Food: a W&I claim free-from Breach and Loss

It’s rare for W&I insurance disputes to proceed all the way to judgment but last week it happened – the Commercial Court handed down a decision in the case of Finsbury Foods Plc v Axis Corporate Capital Ltd & Ors [2023] EWHC 1559 (Comm).

The Judgment makes for an interesting read. Ultimately, the claim failed because the Court found that the Insured would have paid the full purchase price in any event, so no Loss had been caused.

The case highlights the importance of the evidence to the outcome of a W&I claim. The top three takeaways are: the Courts recognise the importance of correcting the information imbalance between the insured and insurers; the buyer’s deal drivers are highly relevant to considerations of Loss; and the buyer’s actual knowledge really will unravel a claim for Breach.

 

The Facts

The Insured (Finsbury Food Group Plc) is a group of food manufacturing companies. The Target (Ultrapharm Limited) is a specialist manufacturer of gluten free baked goods with M&S amongst its most notable clients. Recent years have seen increasing demand for free-from baked goods and, in particular, gluten free. Keen to expand its free-from portfolio, by an agreement dated 31 August 2018 (which was the SPA), the Insured bought the Target for GBP20m.

This case involved a Buyer-Side Warranty and Indemnity Insurance Policy issued by a number of Underwriters. The Policy insured various warranties given by representatives of the Sellers to the Insured Buyer in the deal.

In a nutshell, the Insured brought a claim for indemnity under the Policy asserting that certain of the insured warranties were breached, causing it to have overpaid GBP3,194,370 for the Target.

 

Breach

The Judge found no Breach on the facts.

The Insured relied on two insured warranties relating to the disclosed financial information as at 31 December 2017 (being the Accounts Date): the first warranty confirmed that there had been no material adverse change in trading; the second confirmed that no price reductions had been given that would reasonably be expected to materially affect profitability.

The Insured complained that there had been undisclosed recipe changes and key product price reductions, meaning that each of these warranties were false.

In short, the Judge found that both the recipe changes and the price reductions occurred before the Accounts Date; and, in relation to the recipe changes, also that they were in the ordinary course of business and were not a material adverse change. The Judge observed “The SPA is not intended to be a panacea to resolve any unforeseen consequences of Finsbury’s admittedly light touch approach to due diligence.”

Despite there being no finding of Breach, the Judge helpfully went on to consider wider issues in dispute.

 

The Insured’s Knowledge

The Judge considered whether a ‘Knowledge Exception’ in the SPA operated so as to remove any prospect of a finding of liability. If the Insured had actual knowledge of the circumstances in question and was actually aware that such circumstances would be reasonably likely to give rise to a claim for breach of warranty, there could be no Breach.

It was for the Underwriters to show that the Insured knew of the matters of which it now complained. Seemingly assisted in no small part by a requirement for the Insured to make full and proper disclosure of pertinent documents and the Insured’s own witnesses being found to be “untruthful”, the Judge held that, not only did a representative of the Insured have relevant actual knowledge of the matters that were the subject of the breach of warranty claims, but that individual knew his knowledge was fatal to the claim under the Policy.

 

Causation

The Judge found that, even if there had been a Breach, and had the Insured been informed of material information as to trading and profitability before the Accounts Date, the purchase price would not have changed. The Judge concluded that the Insured would not have walked away from the deal and would have paid the purchase price of GBP20m in any event. So, the Insured failed to prove it had suffered any Loss.

 

Warranty True v. Warranty False

The experts agreed that the conventional way to value this Target was taking a run-rate EBITDA multiplied by an appropriate multiple. The Insured didn’t use the conventional method though; it assessed the value of the company on a 1x sales basis and considered the purchase price to be fixed at GBP20m – the Insured’s reference to an EBITDA multiple was only ever as a retrospective sense-check of the agreed price.

Noting the Insured’s 1x sales valuation approach, the Judge commented that - if there had been a Breach and if the Insured could have proven it suffered any Loss - the purchase price would have been adjusted by the amount of the reduction in sales. That reduction, and therefore the quantum of the Insured’s Loss, would have only ever been GBP300,000.

 

Final remarks

Finsbury tells its own fact specific story but, in doing so, it serves as a helpful reminder of well-established principles - the Judge addresses key points of contractual interpretation, considers materiality in the context of Breach, and places causation at the centre of the picture.

The Underwriters’ defence shines a light on the importance of resetting, so far as is reasonably required, the fundamental imbalance of information between insureds and their insurers. The claim failed on Breach and the Insured's actual knowledge; and the Judge relied on evidence that the Underwriters worked hard to obtain from the Insured through the disclosure process (securing an indemnity costs award for those efforts).

While the facts in Finsbury meant this buyer wasn’t eligible to claim the benefit of its W&I policy, there are ample examples reported by insurers where the product successfully supports the post-deal discovery of warranty breaches. Keeping the lines of communication and information exchange open between insureds and insurers – from underwriting through to claims – is imperative to gaining a shared and fulsome understanding of the facts. Working in cooperation to understand the dynamics of the deal and the impact of those facts on the cover available remains the most effective route to efficient claims resolution.

 

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