Now that W&I has been so widely used for a number of years, a body of notifications and claims is building. Most insurers and brokers prepare claims activity reports, with convergence of experience suggesting that there are notifications to around 20% of policies. Given that alternative dispute resolution or arbitration may be deployed there is still little by way of public information on specific claims, however.

UDP gives us some helpful insights because it was taken through to final trial in the Supreme Court of Victoria.

Our Australian colleagues have prepared a briefing on the case, which you can find on page 13 of our Policyholder Insurance Highlights 2019 here.


UDP, the Insured, purchased the issued shares in 5 Star Foods from the Sellers and obtained a W&I policy from Ironshore. In a broadly familiar way the Sellers were released from liability for breach of the warranties save for fraud, but the Buyer was able to recover under the W&I Policy up to $25m, the policy limit.

The SPA provided for arbitration and the Policy for court resolution.

Claim by the Sellers

UDP only had to pay to the Sellers a portion of the price on completion. The balance was to be paid over the following year. The Sellers claimed in arbitration for the balance of the price. UDP and its guarantor defended the claim and claimed damages on the basis that the Seller should have informed UDP of the pre-completion breach as required under the SPA, and if it had done so UDP would not have proceeded with the purchase at all.


The facts surrounding the breach were as follows. The Group supplied milk and other dairy products on a cost plus margin basis to its most important customer (Lion). The prices depended on the purchase price from farmers. Lion said they had been overcharged, initially stating by around $3m annually. This meant that the financial position was worse than that shown in the accounts and UDP’s position is that it would not have proceeded with the sale if it had known about this. 5 Star Foods was ultimately sold at a significant loss.

Start of parallel proceedings

While the arbitration process was underway UDP made a claim for breach of warranty to W&I Insurers. Proceedings were started and Insurers successfully sought to stay the claim against them pending the Insured’s arbitration with the Sellers given the overlap in issues.

Resolution of the Sellers’ claim

The arbitration claim was resolved with the Sellers having to pay the Buyers damages of over $50m, none of which had (as yet) been recovered. The award was on the basis that UDP suffered a loss of opportunity to avoid the transaction.

Resumption of insurance claim

The stay against Insurers was lifted and the Buyer sought to argue that the Insurers were bound by the findings as to breach of warranty and damages. UDP sought a full policy limit payment. Insurers denied they were bound by the findings notwithstanding they had sought the stay and disputed the quantification of the claim.

Insurers not bound by findings legally – but practically persuasive

The Court determined that the Insurers could not be bound by the findings by the arbitrator because the issues in the two sets of proceedings were not identical and the amount of loss awarded by the arbitrator did not instantly translate to loss for breach of warranty. Further, the underwriters were not part of the arbitration or bound by it, and they had not become bound by it by referring to in their pleadings. The most interesting of the arguments was that as the Insurers sought the stay to allow the arbitration to be the lead matter, it was an abuse of process to then contest the matters decided, but this also failed.

However, as a matter of practicality, the Court held that the extensive evidence in the arbitration could be used to significantly reduce the areas of dispute and short circuit the issues of quantum.

Equally, under English law, you would not generally expect an entity that was not a party to an arbitration to be legally bound by the findings in it, but you would also expect that the second tribunal would (as here) show some pragmatism in avoiding unnecessary duplication.

That this issue was contentious, however, provides food for thought at the transaction stage in relation to the potential for multiple claims and how separate dispute resolution processes can be avoided or managed. The multiplicity of claims arose on unusual facts here but it is not unusual to have complex recourse structures whereby sellers and W&I insurers could both face claims for potentially similar issues.


The warranties in issue were those you would expect, including that the accounts presented an accurate view and were prepared according to relevant accounting standards, there has been no material adverse change since the accounts date, and that the records did not contain material inaccuracies. The Court had no difficulty finding breach based on the evidence in the Court book and expert evidence.

Various methodologies were considered (and rejected) when it came to quantum. The first of these was the methodology adopted by the Buyers in calculating the purchase price. In calculating the price, UDP had multiplied an adjusted EBITDA by an earnings multiple of 4. UDP did not assert this methodology should be used for calculating loss, the experts did not support it and it was rejected. The second was a methodology based on the assertion UDP would not have made the acquisition at all if it had known the true position (i.e. “no transaction” damages to English lawyers). This was the basis of loss assessed by the arbitrator, but for breach of a different term which expressly permitted the Buyer to terminate, and was not appropriate for assessing damages for breach of warranty.

The approach applied by the Court was the difference between the price actually paid and the real or fair value. This was approached on the basis of capitalisation of future maintainable earnings because (a) there were no comparable transactions for a market based approach; and (b) cost of asset based approach was not appropriate for a going concern.

Much of the judgment is concerned with explaining the competing approaches on the facts to quantification, emphasising the complexity inherent in these claims.  In particular, whilst the experts agreed on a multiple of 11 as the starting point, the Court ruled on the competing views as to what discounts should be made to that figure for particular factors. Of most interest, the Court accepted the higher discount attributable to the loss of integrity and reputation resulting from the overcharging, noting (amongst other points) that any intending purchaser would regard deliberate and repeated overcharging as a very serious issue that could impact upon many aspects of the business.

Two points that regularly arise are worth noting in this context under English law. The first is that, while the starting point for “warranty true” value will be what the buyer paid, this is not determinative if the “warranty true” value is considered different, as discussed here. On the facts here using this alternative value this would have made no difference, as the Court acknowledged. The second is that the valuation methodology adopted by the purchaser is likely in the normal course to be highly probative to the approach a reasonable buyer would have taken.

Policy was first response

The final issue is perhaps the most interesting. The Policy provided that the Loss as defined was what would have been recovered from the Sellers absent the liability limitation and that there was no requirement to seek recovery from the Sellers before a claim could be made under the Policy against Insurers, but that the Insured must give credit for Recovered amounts. All of this would be entirely as expected and would expressly support the position that the Policy was first response.

Insurers argued, however, that there was no loss, or it could not be ascertained, while recovery against the Seller remained open. These arguments were based on the asserted duty to mitigate, the argument that there were no Recovered amounts because the necessary steps had not been taken, the assertion that the loss owed could not be calculated without knowing the Recovered amounts and the fact that Insurers could not sue the Seller themselves.

The Insurers’ argument got very short shrift from the Court: “[t]he conditions of the policy are clear and unambiguous and do not support the underwriters’ submissions”. It was stated that it was “plain” that the loss is recoverable even though not all potentially recoverable amounts have been collected and arguments to the contrary would create an “uncertain, uncommercial and unworkable situation”. The full policy limit was recoverable.  If the Insured subsequently recovered from the Seller more than its uninsured loss above the policy limit, it would account to the Insurers.


This case provides some insight into the issues that may arise if there are multiple resolution processes, the extent of points which may be taken by Insurers and how a court may approach them. It also supports the concept of the policies as first response, provides a useful reminder of some of the conceptual issues which can arise and confirms the complexity that can arise on quantification – the judgment here ran to over 150 pages. Insureds would be well advised to make sure that they are fully prepared for the legal and accountancy arguments if they want to achieve the correct return on their premium.


Sarah McNally
Sarah McNally
Partner, London
+44 20 7466 2872
Gary Milner-Moore
Gary Milner-Moore
Partner, London
+44 20 7466 2454
Joanna Giza
Joanna Giza
Associate, London
+44 20 7466 2668