Finsbury Food v AXIS: what are the key takeaways for warranty and indemnity insurers and policyholders?

19 July 2023. Published by Charmaine Chew, Senior Associate and Matt Ward, Trainee Solicitor

The Commercial Court recently handed down its judgment in the case of Finsbury Food Group Plc v AXIS Corporate Capital UK Ltd & Ors [2023] EWHC 1559 (Comm). This is the first time the court has considered a claim under a W&I insurance policy, and provides a helpful example of how key concepts, such as material adverse change and valuation, are considered by the court.

For policyholders, it serves as an important reminder that W&I insurance is not designed to mitigate the impacts of a bad bargain in an M&A deal. 

The facts

In August 2018, Finsbury Food Group Plc (Buyer) completed the purchase of Ultrapharm Limited (Target) for £20 million. The Target was a specialist manufacturer of gluten free baked goods, which had benefitted from a recent increase in demand for such products. One of its biggest customers was Marks and Spencer plc (M&S). The Buyer took out a Policy, which insured various warranties given by the sellers to the Buyer in respect of the transaction. 

The Buyer brought a claim under the Policy alleging that certain warranties had been breached, and that these breaches reduced the overall value of the Target's business by £3,194,370.  

Among the key issues to be decided by the court was whether certain recipe changes and product price reductions given by the Target to M&S amounted to breach of the following warranties:

  • that there had been no material adverse change in the trading position of the Target group since the accounts date (Trading Conditions Warranty); and  
  • that, following the accounts date, there were no agreed price reductions or discounts which would materially affect the Target group’s profitability (Price Reduction Warranty). 

The decision

The court found that the recipe changes and price reductions did not breach either warranty. The fact that the recipe changes and price reductions were agreed and took place before the accounts date, and the warranties applied only to events which had occurred "since the accounts date", was crucial to the failure of the claim. The court also held that the recipe changes would not constitute a material adverse change for the purposes of the Trading Conditions Warranty, and recipe changes were part of the ordinary course of a bakery's business.

Further, the court found that even if breach was proved, the Buyer had not suffered any loss, given that it would have proceeded with the purchase of the Target at the agreed price of £20 million in any event. 

Key takeaways 

Material adverse change

Fundamentally, it was held that the meaning of a material adverse change is subject to context and contractual interpretation. In this case, the clause containing the Trading Conditions Warranty also included additional wording that the Target group's business, profitability or prospects had not been adversely affected by the loss of any customer representing more than 20% of the Target group's total sales since the accounts date. The insurers argued that the clause should be read as a whole, with each part consistent with the other parts – as such, in interpreting the meaning of a material adverse change, the reference to "more than 20% of the total sales of the Group Companies" should apply and set the materiality threshold accordingly.

However, the court disagreed with this interpretation, and took the view that the clause comprised several separate and independent warranties instead. As such, the reference to "more than 20% of the total sales of the Group Companies" could not be used to interpret the meaning of material adverse change, since it applied to a separate warranty. The judge determined that, in this case and context, a material adverse change would cause more than a 10% change in the total sales of the Target group, being a sufficiently significant or substantial change over the relevant period of 9 months.

This case highlights the importance of careful drafting when it comes to "arbitrary" concepts like material adverse change. Specifically, consideration should be given to: (i) structuring of warranty wording to avoid confusion as to whether a paragraph comprises a single warranty (and therefore should be interpreted as a whole), or whether it comprises separate warranties (with each separate warranty being interpreted independently of the other(s)); and (ii) whether it is worth defining material adverse change in relation to a specific threshold, for the avoidance of doubt. 


The Policy included a clause which excluded liability of the insurers if the Buyer 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. Whilst the Buyer’s witnesses submitted they did not have the requisite knowledge, the court found these submissions to be untruthful and as such, even if there had been a breach, the Policy would not respond. Buyers should be advised to account for any known circumstances in the purchase price as they will not be able to retrospectively claim loss for such circumstances under their W&I policy.  

Valuation methodology

The court considered the basis on which the Target was valued to quantify any potential loss suffered by the Buyer. The Buyer had fixed the purchase price at £20 million which was determined by reference to 1 x sales, and so if a breach had been found, the court would have assessed damages on the basis of any reduction in sales (which was assessed at £300,000 at the time). While a more common way to value the Target would be to use an EBITDA figure x a negotiated multiple, this methodology was not used; had it been used, the Buyer could have argued it suffered a greater loss. For insurers, this highlights the importance of determining the methodology used to value the Target early in the insurance process as this will be fundamental to assessing the scale of the loss should a claim arise. 

Final thoughts 

In challenging market conditions, it may be tempting for policyholders to try to recover losses from a bad bargain under their W&I policy. This case serves as an important reminder that the product is not designed for this and courts will be forthcoming in upholding its terms. The case also demonstrates that parties should be cautious when it comes to drafting "arbitrary" concepts such as material adverse change – if there is a specific threshold in mind, consideration should be given to defining "material adverse change" in order to avoid any argument further down the line.  

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