The Federal Court of Australia has provided a rare insight into the interaction between warranty and indemnity policies and share sale agreements in a decision of the Honourable Chief Justice Allsop in Aftermarket Network Australia Pty Ltd v Certain Underwriters at Lloyd's [2016] FCA 1402.

The decision focused primarily on the correct interpretation of specific terms of the relevant Share Sale Agreement (SSA) which determined liability under the SSA and in turn, whether cover was available under the warranty & indemnity insurance policy (W&I policy).

Importantly, it was also determined that, in the context of this W&I policy, the provisions of the SSA were not incorporated as terms of the W&I policy itself for the purpose of the application and the Insurance Contracts Act 1984 (ICA). As a result, the decision did not directly consider the application of the provisions of the ICA to the W&I policy.


In 2014 Metcash Automotive Holdings Pty Ltd (MAH), a subsidiary of Metcash Limited (Metcash), acquired all of the shares from various parties (Vendors) in Midas Australia Pty Limited (Midas) pursuant to the terms of the SSA. MAH purchased a buyer's W&I insurance policy.

The W&I policy came into effect on 6 May 2014 and provided cover for "Loss", the definition of which included the amount that MAH was contractually entitled under the SSA for a breach of warranties by the Vendors under the SSA.

MAH submitted a claim to insurers in March 2015 concerning various alleged breaches of warranties by the Vendor.

Subsequently on 31 July 2015, Burson Group Limited (Burson) acquired all of the shares in MAH (and with it Midas) from Metcash. MAH was subsequently renamed to Aftermarket Network Australia Pty Ltd (ANA).

The SSA included a change of control clause (clause 10.9(g)), which relevantly provided that the liability of a Vendor in respect of any Subject Claim (that could only be made by MAH) is reduced or extinguished to the extent MAH or any of its related bodies corporate ceased to own or control shares in Midas. The proper construction of this clause was at the heart of the dispute.

Did the W&I policy respond?

The relevant question before Chief Justice Allsop was whether the sale of the ANA shares by Metcash to Burson extinguishes, or would extinguish, insurers' liability under the W&I policy on account of clause 10.9(g).

In determining that insurers' liability was extinguished, His Honour considered whether the terms of the SSA (including clause 10.9) were incorporated into the W&I policy as terms of the W&I policy. ANA argued the terms of the SSA formed part of the W&I policy and placed some reliance on section 10 of the ICA – a statutory provision which broadens what might otherwise ordinarily be considered a contract of insurance. Insurers disputed that the SSA terms were incorporated into the W&I policy.

Allsop CJ identified two reasons why this issue was significant:

(a) It could impact the construction and interpretation of the contract because the principles of construction and interpretation of insurance contracts differ to those that apply to other commercial contracts, relevantly the greater willingness to apply the contra proferentem rule as a last resort in respect of insurance contracts; and

(b) If clause 10.9 was incorporated into or forms part of the policy, there may be a greater requirement of concurrence between clause 10.9 and the provisions of the W&I policy.

Ultimately His Honour concluded that, as a matter of contractual analysis, clause 10.9 was not incorporated as a term of the W&I policy and therefore, there was no need for His Honour to apply what he stated to be the different principles of construction and interpretation that apply to insurance contracts than to other commercial contracts. Rather he explained that the terms of the SSA were part of the underlying agreement which formed the subject matter of the insurance. His Honour accepted that there was a "close relationship" between the SSA and the policy, but stated that the warranties under the SSA were only intended to be the foundation of a right to claim under a policy that was anticipated.1 His Honour also found that the mere fact that both ANA and Vendors were, under the terms of the SSA, to jointly pay the premium was not sufficient to incorporate the SSA terms into the W&I policy.

When considering the application of section 10 of the ICA, His Honour noted there was nothing in the SSA which altered how the W&I policy worked. The W&I policy simply operated to indemnify what would be liability of the Vendors from another contract.

His Honour then went on to consider the construction of clause 10.9(g), to give it a business-like interpretation and to avoid making commercial nonsense or working commercial inconvenience. After finding the provision was concerned with a change in ownership and control of Midas (by either ANA or, as here, ANA's related bodies corporate), he concluded it could only operate to extinguish the Vendors' liability.

What was the effect of the decision?

The effect of the decision was that the claims for indemnity under the W&I Policy were unsuccessful as clause 10.9(g) operated to extinguish any liability.

While no appeal of the decision was filed, His Honour did grant leave to file an expedited appeal, which suggests this may be an issue ripe for consideration by an appellate court in the near future.

The judgement gives clarification for underwriters that terms of an SSA are not automatically to be construed as forming part of the W&I policy. It also demonstrates the importance of properly considering the interplay between the terms of a W&I policy and the underlying SSA .

No doubt, as the proliferation of W&I insurance in M&A transactions continues, issues such as these will arise in the context of W&I claims increasingly.