Finsbury Food Group Plc v Axis Corporate Capital UK Limited & Ors

A warranty concerning a material adverse change must be construed according to its language, the contract as a whole, its commercial purpose and the circumstances known at the time of contracting. A quantified threshold elsewhere in the warranty does not necessarily define materiality in a separate limb. In this case, a material adverse change meant a change exceeding 10% of the company’s total group sales. A price reduction was governed by a separate warranty, directed to when it was offered or agreed, rather than when it took effect. The claim failed because the price reductions were agreed before the relevant accounts date, and because the claimant’s relevant individual had actual knowledge of the circumstances. The claim also failed on causation: the claimant would have completed the acquisition at the agreed price in any event.

The claimant acquired Ultrapharm Limited for £20 million under a sale and purchase agreement and obtained buyer-side warranty and indemnity insurance from the defendant underwriters. It alleged breaches of warranties concerning trading conditions and price reductions relating to Ultrapharm’s supply of gluten-free products to Marks and Spencer.

The principal issues were the construction of the trading conditions warranty and price reduction warranty, whether recipe changes and price reductions constituted breaches, whether knowledge provisions excluded liability, and whether the claimant had suffered recoverable loss. The court also considered causation and valuation issues on the assumption that liability had been established.

1. Construction of the trading conditions warranty. The warranty contained separate protections: one concerning a material adverse change in Ultrapharm’s trading position, financial position, prospects or turnover, and another concerning the loss of a customer representing more than 20% of total sales. The 20% threshold did not define materiality under the separate first warranty. A material adverse change required a change exceeding 10% of Ultrapharm’s total group sales.
2. Recipe change. The recipe change did not breach the trading conditions warranty. It had been agreed and implemented before the accounts date. In any event, its effect on two products did not amount to a change exceeding 10% of Ultrapharm’s turnover, and recipe changes were part of the ordinary course of the bakery business unless accompanied by something more.
3. Price reduction warranty. The price reductions were specifically governed by the price reduction warranty and were to be assessed by reference to when they were offered or agreed, not when they became effective. Since the reductions had been agreed before the accounts date, Ultrapharm had not breached the warranty.
4. Knowledge provisions. The court found that the relevant Finsbury personnel had been told of the reductions and had access to pricing data. Mr Randhawa had sufficient information to establish actual knowledge of the circumstances of a warranty claim, even though he had not expressly evaluated the legal consequences at the time. The knowledge exception therefore applied if there had been a breach.
5. Causation and loss. Finsbury would have proceeded with the acquisition for £20 million even if it had known of the alleged warranty claim. It therefore failed to prove loss. The court further observed that, if liability and loss had been established, the appropriate approach would have been to value the reduction by reference to the agreed 1x-sales purchase calculation, producing an adjustment of approximately £300,000.
6. Disposition. The declaration of indemnity and damages were refused. Finsbury’s claim was dismissed.