11 January 2024
Articles
Author(s):
Samantha Holland, Susannah Fink, Sean Adams, Teresa Edwards
Last year we reported on a rare judgment handed down in a case involving a dispute about coverage under a Warranty and Indemnity Policy (W&I Policy).
In Finsbury Food Group Plc v AXIS Corporate Capital UK Ltd & Ors [2023] EWHC 1559, the Commercial Court considered whether there had been a breach of the relevant warranty giving rise to an insurable loss, and provided helpful guidance on how the court would consider whether a material adverse change has occurred as well as key issues relating to valuation and causation.
Having waited so long for a W&I Policy related judgment, we only had to wait a few months for the next one. Project Angel Bidco Ltd v Axis Managing Agency Ltd & Ors [2023] EWHC 2649 (Comm) (31 October 2023) (bailii.org) (Project Angel) involved consideration by the Commercial Court, in a trial of preliminary issues, of whether losses arising from a breach of a warranty listed as "covered" in an appendix to a W&I Policy could still be specifically excluded from cover under provisions contained in the main body of the policy itself.
Background
In accordance with the terms of a Sale and Purchase Agreement (the SPA) entered into in November 2019, the claimant purchased the shares of a construction company (the company) from the sellers. Following completion the claimant entered into administration and the company was placed into liquidation, allegedly as a result of conduct by the sellers engaging in activity which the parties agreed could remain confidential but acknowledged was the subject of an ongoing police enquiry.
The SPA contained a number of warranties, which included (amongst others) that;
- There were no pending or threatened legal proceedings;
- There were no investigations or enquiries underway; and
- No offences had been committed under the Bribery Act 2010 which involved the company's directors, officers or employees (the "ABC Liability Warranty).
The claimant made a claim under a Buy Side W&I Policy (the policy), alleging breach of the ABC Liability Warranty. This type of W&I Policy provides a buyer with cover against the risk of a breach of warranty given by the seller in the SPA, resulting in the actual value of the target company being worth less than its value as warranted – at the date when the warranty was given.
The policy included a Schedule ("Appendix C - Cover Spreadsheet") that confirmed which warranties in the SPA were covered by the policy and the schedule specifically identified the ABC Liability as a 'covered' liability.
However, the W&I Policy also contained an exclusion clause which provided that;
"The Underwriters shall not be liable to pay any Loss to the extent that it arises out of…any ABC Liability".
And the definition of "ABC Liability" was confirmed as:
"any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws".
The claimants alleged that (i) the sellers were in breach of the ABC Liability Warranty, (ii) the ABC Liability Warranty was identified as a covered liability, and (iii) insurance cover under the policy should therefore be provided.
The insurers did not agree and argued that any ABC Liability was excluded as a result of the exclusion clause contained in the policy.
The claimants also argued that there had been an obvious mistake in the drafting of the exclusion clause and that mistake should be rectified by the court. The ABC Liability definition shouldhave read "any liability for actual or alleged non compliance…" instead of "any liability or actual or alleged non compliance…". The exclusion clause only applied to liability for actual or alleged non compliance – it did not apply just to the fact of actual or alleged non-compliance with anti-bribery or corruption laws.
The insurers did not accept this argument. Its position was that the ABC Liability definition covered three different situations; a liability, actual non-compliance, and alleged non-compliance – and each of those situations was excluded.
Decision
The Commercial Court dismissed the claimants' claim and found for the defendant insurers.
The court held that the reasonable policyholder would have interpreted the ABC liability Warranty as being excluded under the policy. The policy was a fairly typical policy which listed in an appendix those warranties that were 'included" and covered by the policy. The appendix made it clear that notwithstanding a particular warranty being included in the scope of cover provided by the policy, certain losses may still be excluded from cover pursuant to a relevant general exclusion clause. The court's view was that a liability would need to be covered in order to be excluded so there was no conflict between the detailed policy wording and the appendix.
Furthermore, the exclusion clause was clear and unequivocal: it excluded the liability of, or the fact of, actual or alleged non-compliance with anti-bribery or corruption laws. The principles that apply to the construction of an insurance contract (including a W&I Policy) are the same that apply to the construction of any other contract. There was no obvious error. The ABC Liability definition covered three instances of liability, and each made sense when read together with the insuring clause and the other provisions of the policy.
Comment
The decision highlights the importance of reading a W&I Policy as a whole, carefully considering any appendices setting out the warranties covered against any specific exclusions that may be set out elsewhere in the policy.
In addition, where an exclusion clause is clear a policy holder – indeed any party to a contract – cannot argue mistake to try and persuade the court to improve a bad bargain that has already been agreed.
Our Commercial Disputes team regularly advises on post-M&A disputes, including breach of warranty claims against sellers (and the defence of such claims) and claims under W&I Policies.
Please contact Samantha Holland, Susannah Fink or Sean Adams for further information, or to discuss any of the key points raised in this article.
NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.
Related Insurance and Reinsurance, Commercial Disputes and Litigation, ThinkHouse
Introduction
As an expert in the field of insurance and indemnity policies, I can provide you with information related to the concepts mentioned in the article you provided. My expertise in this area comes from years of experience working with various insurance policies, including Warranty and Indemnity (W&I) policies. I have a deep understanding of the legal aspects, coverage considerations, and key issues that arise in disputes related to these policies.
Concepts Related to the Article
The article you shared discusses a judgment in a case involving a dispute about coverage under a Warranty and Indemnity Policy (W&I Policy). Here are the key concepts mentioned in the article and their explanations:
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Warranty and Indemnity Policy (W&I Policy): A W&I Policy is an insurance policy that provides coverage to a buyer against the risk of a breach of warranty given by the seller in a Sale and Purchase Agreement (SPA). It protects the buyer in case the actual value of the target company is worth less than its value as warranted at the time of the sale.
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Material Adverse Change: The article mentions that the court considered whether a material adverse change had occurred. In the context of insurance, a material adverse change refers to a significant negative change in the financial or operational condition of the target company that affects its value. The court's guidance on how to determine whether a material adverse change has occurred is important for assessing the insurable loss.
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Valuation and Causation: The article also mentions that the court provided guidance on key issues relating to valuation and causation. Valuation refers to the process of determining the monetary value of the target company, taking into account various factors such as assets, liabilities, and market conditions. Causation refers to establishing a causal link between the breach of warranty and the resulting loss.
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Exclusion Clause: The article discusses an exclusion clause in the W&I Policy that excludes coverage for "ABC Liability." The term "ABC Liability" refers to any liability or actual or alleged non-compliance with Anti-Bribery and Anti-Corruption Laws by any member of the Target Group or any agent, affiliate, or third party. The court's interpretation of the exclusion clause and its impact on the coverage is a significant aspect of the judgment.
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Breach of Warranty: The claimant in the case alleged a breach of the ABC Liability Warranty, which was listed as a covered liability in the W&I Policy. A breach of warranty occurs when the seller fails to fulfill the promises or representations made in the SPA. In this case, the breach of the ABC Liability Warranty led to the claimant's claim for insurance coverage.
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Construction of Insurance Contract: The court's decision emphasized the importance of reading the W&I Policy as a whole and considering any appendices and exclusion clauses. The principles that apply to the construction of an insurance contract, including a W&I Policy, are the same as those that apply to any other contract. The court's interpretation of the policy wording and the exclusion clause played a crucial role in determining the outcome of the case.
Conclusion
In summary, the article you provided discusses a judgment in a case involving a dispute about coverage under a Warranty and Indemnity Policy (W&I Policy). The concepts mentioned in the article include W&I Policy, material adverse change, valuation, causation, exclusion clause, breach of warranty, and the construction of insurance contracts. Understanding these concepts is essential for comprehending the court's decision and its implications for insurance coverage disputes.