Evidentiary Hurdles in High-Value W&I Claims: Key Takeaways from the NSW Supreme Court

In dismissing the insured's claim against W&I insurers, the New South Wales Supreme Court in DTZ Worldwide Limited v AIG Australia Limited [2025] NSWSC 12 has recently provided valuable guidance on the legal principles and methodology for the assessment of damages in breach of warranty disputes arising under transaction documents. Some of the defendant insurers and agents settled the claims against them prior to judgment. The insureds claim against the remaining defendants was dismissed with costs.

Background 

Various insurers provided buy side warranty and indemnity (W&I) insurance cover to the insured claimant under a tower. The covered contractual warranties were furnished by the vendor to the insured in its capacity as the purchaser under the terms of a share sale agreement (SSA) for the purchase by the insured of a global property services and management group. The insured purchaser conducted extensive legal, financial and commercial due diligence and agreed to pay $1.2 billion for the entire global business. The SSA was executed on 14 June 2014. 

The vendor provided a suite of warranties in relation to the business and furnished a contractual indemnity to the purchaser in the SSA. The SSA relevantly required the purchaser to obtain its own W&I insurance which, rather than the vendor, was to be the purchaser's sole recourse in the event of a breach of vendor warranty. 

Premas, one of the companies in the target group, provided property management services in respect of a large Singaporean sports and leisure facility, which was developed and managed under a public private partnership (PPP) structure. The financial, funding and contractual arrangements between the PPP consortium members and financiers were complex and varied across the life of the project. The property management services in respect of the arena were provided by Premas under the terms of a facilities management agreement (the FMA). 

W&I cover

The primary layer policy of the W&I tower (the substantive terms of which were followed in the excess layer policies) was subject to a policy deductible of $12.15 million. The insurers agreed that if the amount claimed under the insurance exceeded $500,000, then subject to their respective attachment points and to their policy limits, they would pay the amounts that the insured would have been entitled to recover from the vendor under the terms of the SSA in respect of a breach of the insured warranties. For this purpose, the vendor hold harmless provisions of the SSA were to be disregarded. 

The Claim

The insured asserted that certain of the vendors financial, accounting and disclosure warranties in the SSA had been breached insofar as these related to various matters concerning the FMA, thereby wrongly inflating the true financial position of Premas.
 
Preliminary notification of a claim under the W&I policy was issued in 2017. By the time of the proceedings, the insured claimed that its loss was approximately $234 million plus costs and interest.  

According to the insured, several specific vendor warranties were breached. These included certain accounting and financial warranties; a "no material adverse affect" warranty; a "truth and accuracy" warranty relating to certain financial reports and a “no material omission/no knowingly withheld material information” warranty.  

Such warranties are customarily identified by W&I claimants as having been allegedly breached. Understanding, analysing, assessing, and determining whether on their specific express terms and having regard to the relevant circumstances these warranties have been breached can often be a complex and challenging task for insurers and courts. The analysis invariably requires input from appropriately qualified accounting, valuation and financial experts. 

The issues stemming from the FMA that gave rise to the alleged warranty breaches were said by the insured to include the wrongful capitalisation treatment by Premas of costs overruns under the agreement; the financial and accounting treatment by Premas of increases in facilities cleaning costs; the tracking and management of asset costs; issues arising from the poor quality of the grass playing field at the facility and the imposition of performance penalties on Premas under the FMA. Some of these issues persisted after completion of the SSA. 

The insured asserted that Premas (and therefore the vendor) had improperly accounted for payment adjustments which were characterised by the insured as "Side Letter Payments";  wrongly capitalised the so called project set up or  "mobilisation" costs in the FY 2012 and FY2013 accounts and despite the issues with the FMA wrongly failed to recognise and treat the FMA as an onerous contract in accordance with applicable accounting standards and thereby failed to make an appropriate provision in the FY2014 accounts as required in accordance with those standards. 

The allegations 

The court considered extensive and detailed accounting, finance and valuation evidence. The analysis was hampered to some extent by the absence of some potentially relevant contemporary documents. The court was however able to draw inferences and conclusions as to the adoption and application of accounting and financial policies by or on behalf of Premas. 

Side Letter allegations 

This included examining the financial treatment and true nature of the so called Side Letter payments made to Premas which the insured had sought to characterise as sham arrangements. The court determined that this allegation was not made out by the evidence. Rather, those amounts were found to be payments that were agreed to be made in order to compensate Premas for the substantial cost increases it incurred in providing the services. The accounting treatment of those payments was found to have been correct. 

Mobilisation costs

The court did not accept the criticisms made by the insured's expert as to the accounting and capitalisation treatment by Premas of certain project mobilisation/implementation costs incurred by Premas in relation to the FMA. Although there was little documentary evidence available on the point, in rejecting the insureds allegations, the court was influenced by the fact that the internal management of Premas and its external advisers were satisfied with the approach adopted and the conclusions reached at the time - and which the court found to have been reasonable. The court determined that the insured failed to prove this element of its claim. 

Onerous Contract 

The court also rejected the insured's allegation that Premas failed properly to account and to provision for the FMA as an onerous contract. The court did not accept the joint view of the experts that the relevant dates for determining whether the FMA was an onerous contract were the dates of signing and completion of the SSA. Instead, the court determined that the correct date at which to determine whether the accounts were misleading such as to have breached the impugned warranty was the date on which the relevant accounts were prepared. That is, the relevant warranty was not breached because the accounts in question did not correctly reflect the true financial position at some later date. On that basis, the court held that it was not plausible or credible to suggest that the FMA should have been recognised as an onerous contract in those accounts. The court was also not persuaded on the evidence before it that there was any relevant awareness by Premas at the relevant time that the FMA had become an onerous contract. That the FMA had a long 25 year term appears to have been relevant to this aspect of the court's decision. However, the court accepted the insured's alternate case that the vendor’s disclosures in relation to the increased cost of cleaning arising under the FMA were misleading and resulted in a breach of one of the limbs of the disclosure warranty. 

Assessment of Damages

The judgment contains a comprehensive and detailed summary of the relevant legal principles and authorities. The general principal for the assessment of damages in the case of a breach of contract is that the award should, so far as possible, place the injured party in the position it would have been in had the contract been performed in accordance with its terms. 

In the case of the breach of contractual promise, (here, a contractual warranty) as to the existence of a fact or state of affairs which has a bearing on the value of the subject matter of the contract, the usual measure of damages is the difference between the "true" value of that thing ( that is if the relevant representation was true), and its actual value as at the date of the breach.  In the case of shares, a court is required to make an assessment of the true value of the shares on a hypothetical basis – namely on the basis that the representation/warranty made was true and an assessment of the actual value of those shares. The actual price paid for the shares may be (and sometimes in appropriate circumstances, is) used as a proxy for the true value.

However, damages are not to be assessed by blindly comparing the true value of the shares with the price actually paid. The value is to be assessed by undertaking an objective exercise to determine the amount/price as at the valuation date for which an asset should exchange between willing, prudent and knowledgeable buyers and sellers acting at arm's length and after proper marketing. 

Although the insured's breach of warranty case largely failed, the court undertook a detailed analysis and application of the principles to the pleaded claim in order to determine whether any damages were recoverable in respect of the successful part of its case. 

The insured pursued two main approaches. One sought the net present value of losses allegedly arising from the FMA on the basis that it was and should properly have been treated as an onerous contract. The other posited a discount rate adjustment to the target group’s overall valuation to reflect the alleged accounting errors. The court ultimately found both these methods to be flawed. 

First, the court concluded that there was no sustainable evidence that the FMA was truly onerous. Second, where the insured’s expert proposed a discount rate, the court rejected the underlying assumption of fraud or egregious accounting errors. The court also held that the academic literature on which the insured’s expert sought to rely was not relevant to the subject matter at hand. Finally, as noted above, while the court determined that the insured had established a limited breach of the disclosure warranty, there was no evidence before the court as to the assessment and calculation of any consequential damages. The court was therefore unable and unwilling to undertake such an assessment without the assistance of expert evidence. Despite this, the court determined that in any event, the amount of any damages that may have been properly recoverable by the insured would have been less than the attachment point of the excess cover in the insurance tower. The court therefore concluded that none of the remaining defendants had any liability to the insured in respect of that breach. 

Consequently, no damages were awarded to the insured in respect of that - or any other - element of its claim.

Interest and excess attachment points

The court made some observations in relation to the insured's  claim for interest under section 57 of the Insurance Contracts Act 1984 (Cth) (ICA). This Australian federal insurance legislation provision requires an insurer to pay a prescribed rate of interest from the date on which it became unreasonable for the insurer to withhold payment in respect of a claim. 

The insured claimed interest from the date 6 months after the date it provided its formal claim notice (being 3 November 2017). The court rejected that claim and accepted the defendants' submission that interest should only run from the time that the insured properly quantified its claim - in this case, when the insured served its expert report in the proceedings on 29 November 2022. 

The court did not accept the excess insurer defendants' additional submission that, on the terms of their excess policies, those defendants were not liable to pay any amount unless and until insurers of underlying policies in the tower had paid, agreed to pay or were found liable to pay under their policies - which did not occur until shortly before the hearing.  

In observations that will be of interest to excess insurers, albeit in the context of this particular Australian legislative provision, the court opined that for the purposes of section 57 of the ICA it would be unreasonable for excess insurance to withhold payment under their policies in circumstances where on the material before them it was apparent that they were liable. The court also observed that it would not be reasonable for excess insurers to rely on the unreasonable conduct of underlying insurers as a basis for refusing to pay any amounts due under their own excess policies, regardless of the attachment points and terms of their excess policies. 

Key Takeaways

This decision highlights the evidentiary hurdles for insured plaintiffs seeking high-value W&I recoveries. This is particularly the case where the impugned warranties are of a financial, accounting or valuation character where insured claimants are required to produce precise evidence linking accounting misstatements to actual loss.

The court reinforced the boundaries of recoverable loss for warranty breaches and the importance of following damages valuation methodologies.

Sellers must be conscious of how even partial truths in data room disclosure materials can be misleading if material updates are withheld and/or omitted before completion. 

The court's analysis and observations also reinforce the increased evidential and informational challenges facing insurers in assessing claims under buy side as compared with sell side policies. As displayed in this judgment, accessing critical background and historical information about the underlying transaction is often more challenging under buy side arrangements. 

Clyde & Co acted for several of the excess insurer parties in the proceedings. 

The full decision can be found here:  https://www.caselaw.nsw.gov.au/decision/19323d5119c4c8195c63934a