Warranty and Indemnity Claim “Over-Baked”: Key Takeaways for Policyholders from Finsbury Food v Axis

6 minute read | July.28.2023

The Commercial Court has recently ruled in favour of the Defendant insurers following a claim that was brought by the policyholder under a warranty & indemnity (W&I) insurance policy. Finsbury Food Group plc v Axis Corporate Capital Ltd & Ors[1] is the first case of its kind to be heard in the Commercial Court and the judgment provides guidance in an area where there is little existing case law. Policyholders should take note of the hurdles they will have to overcome in order to bring a successful claim.

The facts

Finsbury Food Group plc (“Finsbury”) purchased the entire share capital of the target, Ultrapharm Ltd (“Ultrapharm”), in August 2018. Ultrapharm was a specialist manufacturer of gluten-free baked goods. Ultrapharm gave certain warranties in the SPA which Finsbury claimed were breached and that these breaches were covered by the terms of a buyer-side W&I policy which it took out. In summary the key issues were as follows. 

Material adverse change

One of the warranties given by the sellers was that since the accounts date (31 December 2017), there had been no material adverse change in the trading position of Ultrapharm. The judge (Lionel Persey KC) held that there is no set meaning ascribed to “material adverse change” [118]. However, citing existing authority he held that “material adverse change” means something that was “substantial or significant as opposed to something of a de minimis level” [119]. Interestingly, the judge held that a change of 10% to total group sales since the accounts date would rise to the level of a material adverse change [124].

Actual knowledge

Whilst the Court found that there had been no breach of the above warranty or of another warranty (relating to no price reductions or discounts being offered since the accounts date), it considered the hypothetical counter-factual position. The SPA contained an exception that the warrantor (Ultrapharm) would not be liable for a breach of warranty if Finsbury had actual knowledge of the circumstances of a warranty claim and was actually aware that such circumstances would be reasonably likely to give rise to a warranty claim [7]. 

The burden of proof fell on Finsbury to establish that Ultrapharm had breached a warranty in the SPA [142]. However, the underwriters carried the burden of proof when relying on an exclusion clause in a policy or an exception in the SPA (and so needed to prove “actual knowledge” on the part of Finsbury [142]). The insurers argued that provided the individual in question had “all the facts available to him then Finsbury cannot say he did not have actual knowledge” [148]. Otherwise, it would lead to a commercially nonsensical position whereby Finsbury could say that even if Ultrapharm had provided the relevant data by email but Finsbury had ignored the email or chosen not to open it before completion it did not have “actual knowledge” [148]. In this case, the relevant individuals were deemed to have actual knowledge, with the result being that there was no breach of warranty. 


The Court also considered whether, in the event of a warranty breach that was covered under the policy, causation could have been established. It found that, on the facts, the sellers of Ultrapharm were unenthusiastic about the deal and were not prepared to accept less than the agreed price of £20 million [156]. Equally, Finsbury was not prepared to walk away from the deal and was determined to pay the purchase price of £20 million. Even if a material change to Ultrapharm’s trading position or profitability had come to light, Finsbury would most likely have proceeded with the deal at the agreed purchase price [154]. The price paid was therefore “hard-coded” into the model and, as such, there was therefore no causation linking a hypothetical breach to the £3 million in damages claimed by Finsbury.

Valuation methodology

The experts engaged by the parties each reached differing conclusions as to the ‘as-warranted’ value of Ultrapharm at the time of the acquisition. In its judgment, the Court decided that neither experts’ valuation was satisfactory, and reached its own conclusion that Ultrapharm’s true value, based on a 7.5x EBITDA multiple, was likely around £16 million [167]. However, as the purchase price of £20 million had been agreed on a basis of 1x Ultrapharm’s annual revenues (which the judge stated was an “unconventional method”), it followed that any damages flowing from a hypothetical breach of warranty should be calculated on the same basis (i.e. the reduction in value of annual sales attributable to the recipe change and price reductions), which was assessed as £300,000 at the time. Therefore, even if there had been a covered warranty breach and causation could have been established, Finsbury’s loss would have been capped at £300,000 [170].

Key takeaways

Few W&I claims litigate through to trial. This case is instructive in the following respects:

  1. Material adverse change may (or may not) be defined within the SPA itself. When it is not defined, it will be fact-specific as to what it comprises, but a 10% change (in this case of total group sales) was deemed to be a reasonable threshold.
  2. When relying on an exclusion to cover, or an exception in an SPA which refers to “actual knowledge”, the burden will fall on insurers to establish such knowledge. Again, this will be fact-specific. The courts will look at what facts were made available to the relevant party at the time (rather than take an overly strict view of what any particular individual in question actually thought at the time). A party challenging actual knowledge would not be able to rely on any wilful blindness to those facts.
  3. Even if a buyer/policyholder gets over the hurdle of establishing that there was a breach of warranty, it will need to overcome arguments from insurers that it would have purchased the target for the same price in any event. Contemporaneous evidence regarding negotiations and the approach taken by the buyer will be key in this respect.
  4. Whilst the parties will adduce valuation evidence as to the “as warranted” and actual value of the targets, the valuation methodology which was in fact relied upon by the buyer may hold the greatest weight in assessing damages.

[1] [2023] EWHC 1559 (Comm)