Why warranty & indemnity insurance cannot negate the need for reasonable due diligence
A recent case heard (Finsbury Foods Plc v Axis Corporate Capital UK Limited & Ors  EWHC 1559 (Comm)) involved a warranty and indemnity (W&I) insurance claim – a first for the High Court.
The insurance providers successfully defended the claims brought against them in the case and had their costs awarded on an indemnity basis.
What was the claim?
Finsbury Food Group Plc (Finsbury) had purchased a W&I policy from the defendant insurance providers in relation to their purchase of Ultrapharm Limited (Ultrapharm), a company specialising in manufacturing gluten-free bread and bakery products.
The SPA relating to the purchase included various warranties and Finsbury argued that Ultrapharm had breached two of these warranties (relating to price reductions/recipe changes and the trading position not being “materially adversely affected”). Finsbury argued that, had they known about these matters prior to the acquisition completing, they would have offered a lower purchase price.
The court considered the recipe changes to be an ordinary part of the bakery’s business and therefore not a “material adverse change”, which would have been required for a breach of the warranty.
Perhaps more interestingly, when considering the price reduction, the court determined that Finsbury would be expected to have conducted appropriate due diligence prior to purchasing Ultrapharm and noted that the price reduction came into effect prior to the last available set of accounts – the warranty only covered matters arising since the last accounts date and, in the Judge’s own words, Finsbury “was not concerned with carrying out a rigorous due diligence process” and instructed his advisors to take a “light touch” approach to diligence (again confirming the trading position had not been materially adversely affected).
The case involved other issues around knowledge of the officers of Finsbury and failure by Finsbury to demonstrate loss but the key takeaway for any party considering putting a W&I policy in place is that it is unlikely to be a simple fix for failing to undertake proper due diligence.
If you have any queries on the above or need to get in touch for advice in respect of due diligence for a business purchase, please get in touch with our corporate team. Alternatively, call our Reception on 01642 610300 or send an enquiry email.