Amcor Flexibles Group Pty Ltd v AIG Australia Limited [2016] FCA 1428

File number:

VID 1102 of 2016



Date of judgment:

24 November 2016


INSURANCE – buyer’s warranty and indemnity insurance policy – assessment of quantum in respect of certain breaches


Insurance Contracts Act 1984 (Cth)

Date of hearing:

24 November 2016




General Division

National Practice Area:

Commercial and Corporations


Commercial Contracts, Banking, Finance and Insurance

Insurance List



Number of paragraphs:


Counsel for the Applicants:

Mr J Delany QC with Mr T Clarke

Solicitor for the Applicants:

Gilbert + Tobin

Counsel for the Respondent:

Dr C Button with Ms R Campbell

Solicitor for the Respondent:



VID 1102 of 2016



First Applicant


Second Applicant







24 NOVEMBER 2016


1.    The matter be stood over for case management at a date to be fixed in the week commencing 28 November 2016.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.




1    In an originating application dated 13 September 2016, the applicants seek declarations and other relief against the respondent insurer. The dispute arises out of a buyer’s warranty and indemnity insurance policy. The policy was issued by the respondent, AIG Australia Limited (AIG) to Amcor Packaging Australia Pty Ltd (Amcor Australia). AIG has over 12 months ago admitted liability under the policy. The parties to the dispute have not been able to agree on quantum. Relief was sought in the Insurance List to determine the proper method of approaching the question of quantum. The applicants and the respondent have each put forward a method that was said to reflect the proper measure of damages.

2    The facts are as follows. On 6 March 2012, Amcor Australia entered into a share sale agreement to acquire 100% of the share capital of the first applicant, Aperio Group Pty Ltd (Aperio), which has since changed its name to Amcor Flexibles Group Pty Ltd, for the sum of A$238 million (the Acquisition Agreement). On the same day, Aperio entered into a share sale agreement to acquire the remaining 30% of the issued share capital that it did not already own in Packsys Holdings (NZ) Limited and its subsidiaries (Packsys). On the same day i.e. 6 March 2012, AIG issued the policy. On 27 April 2012, Amcor Australia nominated the second applicant, Amcor Packaging (Asia) Pty Ltd (Amcor Asia), as a substitute buyer under cl 17.1(a) of the Acquisition Agreement and provided written notification to AIG under the policy.

3    On 11 May 2012, completion occurred under the Acquisition Agreement and Amcor Asia acquired 100% of the share capital in Aperio and, indirectly, of Packsys. Under cl 2.1 of the policy, AIG indemnified the insureds against any ‘Loss’ covered by the policy.

4    Clause 2.1 was in the following terms:

2.1 Insuring clause

Subject to the terms and conditions of this Policy, the Insurer shall, in excess of the Retention and in aggregate up to the Limit of Liability, indemnify an Insured for, or pay on their behalf, any Loss covered by this Policy which is discovered and reported by an Insured to the Insurer during the Policy Period.

5    Both the applicants are Additional Insureds under the policy.

6    Schedule 3 to the Acquisition Agreement included the following warranties by the sellers:

6.2(d)    So far as the Sellers are aware, the relevant Transaction Entity is capable of fulfilling or performing each Contract in material compliance with the terms and conditions of that Contract.

18.2(a)    All historical and factual information and documents prepared by or on behalf of the Transaction Entities in relation to the business and the Transaction Entities and which are contained in this agreement and the Disclosure Materials are materially accurate and not misleading in any material respects.

18.2(c)    So far as the Sellers are aware, all historical and factual information relating to the Business or the Group, including liabilities of any Transaction Entity, which would be material to a sophisticated buyer of the Sale Shares (having regard to the nature of the Business and the assets of the Transaction Entities) has been disclosed to the Buyer in writing where such failure to disclose will, or could reasonably be expected to have, a material adverse effect on any Transaction Entity.

7    During the sale process, Amcor Australia was provided with “Disclosure Materials” defined pursuant to cl 1.1 of the Acquisition Agreement. The Disclosure Materials included:

(a)    a copy of the contract between Packsys and its key customer, Teys Bros (Holdings) Pty Ltd (Teys), which set out the terms on which Packsys would supply packaging to Teys (the Teys Contract);

(b)    a Deed of Variation to the Teys Contract; and

(c)    a copy of a document entitled ‘Packsys Australia New Business Wins’.

8    In the Disclosure Materials, it was disclosed that:

(a)    Packsys was entering into an extension of the Teys Contract to extend its term for a further four years;

(b)    a 33% gross profit margin would be earned in respect of the continuing and new Teys business; and

(c)    Packsys had secured the exclusive right to supply perforated on rolls (POR) and bone-in bags to new Teys sites at Wagga Wagga and Naracoorte, representing additional revenue of approximately A$2.6 million annually for POR bags (the New Business).

9    I should add here for clarity that Teys runs abattoirs.

10    In order to have the capacity needed to service the New Business, Packsys needed to order and acquire a new high speed bag maker. While negotiating to extend the contract, Packsys had represented to Teys that a new high speed bag maker was “arriving Q1 2012” and on 9 December 2011, Packsys had again represented to Teys that “we are purchasing a state of the art bag maker for Brisbane”.

11    Amcor Australia asserts that it agreed to pay a total purchase price of A$283 million for Aperio (and Packsys) on the basis of its valuation of those entities and the information provided in the Disclosure Materials. In deciding to enter into the Acquisition Agreement at that price, Amcor says that it relied principally on its own discounted cash flow (DCF) valuation of the Aperio and Packsys businesses, which indicated a total value (excluding synergies) of A$232.3 million (the Original Valuation). These facts are not agreed by AIG, but they are central to the resolution of the question of quantum. The applicants say that in breach of the seller warranties in the acquisition agreement:

(a)    the Amcor group was not informed before signing or completion of the Acquisition Agreement that, in early 2012 and prior to completion, Packsys had agreed to provide Teys with a 20% price reduction, which reduced the gross profit margin in respect of supply to Teys (the Price Reduction Claim)

(b)    in respect of the New Business to supply POR bags to new Teys sites at Wagga Wagga and Naracoorte:

(i)    the Amcor group was not informed before signing or completion of the Acquisition Agreement that Packsys had not acquired the high-speed bag maker required to meet the supply of POR bags to those new sites (the Bag Machine Claim); and

(ii)    Packsys was not capable of fulfilling the New Business because it had not acquired a new high-speed bag maker.

12    Following completion under the Acquisition Agreement, Packsys’ inability to comply with orders under the Teys contract apparently resulted in back orders, complaints and quality failures. It is said that as a result of that poor performance by Packsys, Teys terminated the New Business in September 2012.

13    Under cl 10.6A of the Acquisition Agreement, the applicant’s recourse in respect of the breaches of warranty lies only under the policy.

14    Loss is defined in cl 4.1 of the policy as follows:

4.1 Definition of Loss

Subject to the other provisions of this clause 4, Loss means:

(a) the amount of Losses (as defined in the Acquisition Agreement) which the Insureds would have been entitled to claim against the Sellers (or any one of them) pursuant to the Acquisition Agreement in respect of a Breach or an Insured Indemnity if the Sellers (or any one of them) had been liable to the Insureds under the terms of the Acquisition Agreement, disregarding any qualifications or limitations on the Sellers' liability in the Acquisition Agreement, including the minimum and maximum claims amounts in clauses 8.4, 8.5 and 9.5, the time limitations in clause 8.7 and 9.5 of the Acquisition Agreement, the release in clause 10.6 of the Acquisition Agreement and the limitations specified in clauses 8.9, 8.10, 8.11 and 8.12; and

(b) any related Defence Costs

15    Losses is defined in in the Acquisition Agreement as follows:

any losses (including loss of profit and loss of expected profit), claims, expenses, liabilities (whether actual, contingent or prospective), damages, costs, charges, outgoings, criminal or civil fines or penalties, payments, diminution in value or deficiency of any kind or character, which a person pays, suffers or incurs or is liable for and includes Taxes, Duties and Tax Costs.

16    In November 2014, Aperio made claims under the policy with respect to the Price Reduction Claim and the Bag Machine Claim warranty breaches.

17    On 12 November 2015, AIG notified Aperio that it accepted that the following breaches of insured warranties occurred:

(a)    with respect to the Price Reduction Claim, the Sellers breached cl 7.1 of the Acquisition Agreement, in that the warranties in paragraphs 18.2(a) and 18.2(c) of Schedule 3 were untrue;

(b)    with respect to the Bag Machine Claim, the Sellers breached cl 7.1 of the Acquisition Agreement, in that the warranties in paragraphs 6.2(d) and 18.2(c) of Schedule 3 were untrue.

18    The applicants have sought to quantify the indemnified losses as the difference between:

(a)    the DCF valuation indicated by its Original Valuation; and

(b)    the DCF valuation indicated in a revision, which applies the same valuation model as Amcor Australia’s Original Valuation, but incorporates adjustments to the maintainable earnings of Packsys, reflecting both the Teys price reduction and the loss of the New Business at Wagga Wagga and Naracoorte (net of the price reduction at these sites) (the Revised Valuation).

19    It is to be noted at this point that the Revised Valuation takes account of realities that have occurred since the purchase. That DCF valuation model and the adjustments to maintainable earnings made in the revised valuation have been explained in an affidavit of Mr Andrew Terry, sworn 13 September 2016.

20    Aperio first submitted the revised valuation to AIG on 7 October 2015 at which time it quantified AIG’s liability under the indemnity calculated in accordance with the method above. Despite extensive correspondence and discussion, AIG has not accepted the applicant’s method of quantifying AIG’s admitted obligation to indemnify its losses.

21    In her letter of 12 November 2015, Ms Ami Kalmath, the senior technical claims advisor to AIG said the following:

3.3 AIG is continuing to analyse the quantum of loss claimed to have been suffered by Amcor as a result of the breaches of Warranty. AIG has retained experts to assist it in this task and significant progress has been made already in this analysis. We are progressing the quantum analysis as quickly as possible and we expect to be able to communicate AIG's position on quantum no later than 4 December 2015, although if it transpires that we are able to communicate our position at an earlier time, we will certainly do so, being mindful that the Insured is keen to resolve this matter at the earliest.

22    The applicants seek the following relief:

(1)    A declaration that the Loss to be indemnified by the respondent in respect of the accepted breaches of insured warranties is to be calculated as the difference between:

(a)    the final DCF valuation derived by Amcor Australia for the first applicant (Aperio) immediately prior to signing of the Acquisition Agreement; and

(b)    the modified DCF valuation derived by the applicants, incorporating adjustments of the maintainable earnings of Packsys (and its subsidiaries) to:

(i)    reflect the 20% price reduction granted to Teys in early 2012; and

(ii)    remove the earnings forgone by Packsys from Teys in respect of the Wagga Wagga and Naracoorte sites, which business Packsys lost in September 2012, because it did not have additional capacity to fulfil those orders,

as reflected in the Revised Valuation model that Aperio sent to AIG on 7 October 2015 as referred to in the Affidavit of Andrew Terry sworn 13 September 2016.

(2)    Indemnity under the policy.

(3)    Interest pursuant to s 57 of the Insurance Contracts Act 1984 (Cth) on an amount calculated in accordance with paragraph 1, for such period as the Court determines it was unreasonable for AIG to have withheld payment.

(4)    An order that AIG pay the applicants’ costs.

(5)    Such other orders as the Court thinks fit.

23    The applicants put their position as follows at [27]-[28] of their concise statement:

[27] The Loss to be indemnified under the Policy is the damages for which Sellers would have been liable for breach of warranty under the Acquisition Agreement. That is the amount of damages that would put the Applicants in the same position as they would have been in had the warranties been true.

[28] Amcor Australia entered into the Acquisition Agreement in reliance on the truth of the warranties: cl 7.3 of the Acquisition Agreement, and Amcor Australia assumed the correctness of the warranties in preparing the Original Valuation.

24    The applicants emphasise that the standard measure of damages for breach of warranty reflects the difference between:

(a) what the value of the purchased shares would have been, had the warranties been true; and

(b) the true value of the purchased shares

25    In quantifying that difference, the basic principle is, it is said, that a common valuation method should be applied to determine both the counterfactual and the true value of the shares.

26    As will be seen below, I have some difficulty with some of the matters in those submissions. The applicants’ quantification method, being the differences in the value indicated by the original and revised valuations, is said to be both clear and consistent with the principles above, and it is said that, in the absence of manifest error, there is no reason why the purchaser’s valuation method should not be applied in quantifying the loss.

27    AIGs position is explained in its concise response. It accepts that the vendors under the Acquisition Agreement breached certain warranties stated in that agreement and, subject to an obligation under the policy to mitigate loss, the applicants are entitled to be indemnified under the Loss as defined in the policy. AIG says that, subject to mitigation, the loss for which the applicants are entitled to be indemnified is the difference between the value of the shares in Aperio on the basis that the warranties in question were true (the Value as Warranted) and the value of the shares in Aperio actually acquired (the Value as Delivered).

28    AIG says that the difference may be calculated either by:

(a)    determining the net present value of the lost profit which would have been earned during the term of the Teys Contract had the warranties been true (the Lost Profits Method); or

(b)    determining, using a discounted cashflow methodology (the DCF Business Valuation Method), the value of the company acquired on the basis that the warranties in question were true and subtracting from that figure the value of the company actually acquired.

29    Both these approaches of AIG will involve a detailed valuation process for the totality of the business. The respondent disputes that the original valuation accurately identifies the Value as Warranted, and disputes that the applicants’ Revised Valuation accurately identifies the Value as Delivered.

30    A summary of the principal issues taken by AIG with the applicants’ approach are set out in (a) to (d) of para 3 of its concise response as follows:

(a)    the Original Valuation assumes revenue and profit from the Teys Contract in perpetuity notwithstanding that the termination date of that contract was 31 December 2015;

(b)    the Revised Valuation assumes the negative impact of the lesser profitability on the remaining Teys Contract and the loss of the New Business would persist in perpetuity (i.e. that the business would never recover profitability and that the lost New Business would never be replaced);

(c)    the Revised Valuation makes no allowance for the opportunity to earn profits on production capacity which had been applied to the New Business; and

(d)    the applicants calculation of their Loss as being the difference between the result of the Original Valuation and the Revised Valuation takes no account of the extent to which the value of synergies means that the Value as Delivered was not lower than the Value as Warranted.

31    It seems to me that both the applicants and the respondent may, to a degree, be overcomplicating this matter. Both parties accept that AIG is liable to indemnify the buyer for the damages for which the sellers would have been liable. These are the damages that would put the buyer in the position it would have been in had the warranties been true, in the sense that the warranties had been complied with. In this respect, it is fundamental to understand that the warranties are warranties of full disclosure.

32     In paragraphs 3.1(a), (b), (e) and (f) of the letter of Ms Ami Kalmath, the senior technical claims advisor of AIG, the following admissions of liability were made:

3.1 Based on the above, AIG considers that:

(a) with respect to the Price Reduction Claim, the Sellers breached Clause 7.1 of the SSA in respect of the Warranty in paragraph 18.2(a) of Schedule 3 to the SSA. This is because the Sellers' representation in the 'Packsys Australian new business wins' document that the gross profit margin on the Teys Contract was 33% was not materially accurate, and was misleading in a material respect. The gross profit margin was in fact materially lower, at 16% (by Amcor's calculation). The true margin was not disclosed in the Disclosure Materials.

(b) with respect to the Price Reduction Claim, the Sellers breached Clause 7.1 of the SSA in respect of the Warranty in paragraph 18.2(c) of Schedule 3 to the SSA. This is because the Sellers were aware, but did not disclose, that a new pricing schedule applied under the DOV which reduced the prices under the Teys Contract when compared to the original Supply Agreement such that the gross profit margin on the Teys Contract was materially below 33%. The fact that the gross profit margin on the Teys Contract was materially lower than 33% had a material adverse effect on Packsys, and should have been disclosed to the Buyer.

(e) with respect to the Bag Machine Claim, the Sellers breached Clause 7.1 of the SSA in respect of the Warranty in paragraph 6.2(d) of Schedule 3 to the SSA. This is because Packsys was unable to materially perform all the terms and conditions of the Teys Contract. Packsys was not able to comply with the orders made under the Teys Contract because it did not have the capacity to make the requisite number of bags in time. The Sellers were aware of this, but this was not disclosed in the Disclosure Materials.

(f) with respect to the Bag Machine Claim, the Sellers breached Clause 7.1 of the SSA in respect of the Warranty in paragraph 18.2(c) of Schedule 3 to the SSA. This is because the Sellers were aware that Packsys was unable to comply with the orders made under the Teys Contract because it did not have the capacity to make the requisite number of bags in time, but did not disclose this information in the Disclosure Materials in circumstances where this failure to disclose could be reasonably expected to have a material adverse effect on Packsys. [emphasis added]

33    These admissions were distilled by the applicant in a form that I have earlier identified in para [17] above. I do not understand there to be any fundamental difference or dispute about the distillation by the applicants of the admissions made in November 2015.

34    Whilst this is not the occasion to decide any issue, not having had submissions directed fully to the matter, it seems to me that there are a number of considerations as to the assessment of quantum. It is necessary to set them out because if they are the correct way to look at the matter, I would not order a separate issue hearing as currently propounded by the applicants.

35    As will be seen, on this hypothesis, it would not matter what the true value of the shares is or was. Whatever they may be and whatever has happened in the running of the business, a number of propositions seem to me to be clear. They may or may not all be amenable to proof.

36    The propositions are based upon the fact that a purchase price was struck and full disclosure was not made. The propositions are as follows:

37    First, the buyer agreed to pay A$238 million, it is said, on the basis of the truth of the warranties. This is not admitted, but if true, should be amenable to proof.

38    Secondly, if the warranties had been complied with, the matters not disclosed– see paragraphs 3.1(a), (b), (e) and (f) of Ms Kalmath’s letter of 12 November 2015 – would have been disclosed prior to settlement.

39    Thirdly, if such disclosure had taken place, the original valuation referred to above would have had a different form and produced a different value. A value sum, presumably below A$232.3 million, would have formed the basis of a proposed offer. The DCF model would have incorporated such information and would have led to a different value sum. What would have been or may have been the amendment would be a matter of evidence.

40    Fourthly, if the valuation was for a sum below $232.3 million, Amcor Australia may have offered a sum somewhat above that, comfortable with what it did in offering $238 million, being nearly $6 million above the valuation, presumably for what may well have been synergies.

41    Fifthly, if that sum would have been acceptable to the sellers, the loss to the buyer is the lesser sum that would have been paid for the shares, irrespective of the value and irrespective of what has happened with the business since then.

42    Sixthly, if it cannot be proved what sum would have been offered based on that putative Revised Valuation, or it cannot be proved what would have been acceptable to the sellers, it may well be that what has been lost is the loss of a chance to negotiate a sale and purchase of a business with the warranties complied with, that is with the relevant information contained in those warranties disclosed.

43    Alternatively, it may be that a variant of some approach identified by AIG is necessary.

44    It is, with respect, most unsatisfactory that matters have reached this point over a year after liability attended. I am not privy to the discussions and who should bear responsibility for the delay. I propose, subject to hearing from the parties, to order a course that would have the matter resolved as soon as possible.

45    What I propose to order is that the parties attend a mediation. The parties are skilled and experienced commercial entities. They should choose a mediator with accounting and valuation skills. At that mediation, I would expect that the senior decision-makers of the parties be in attendance.

46    If the matter cannot be resolved by agreement, as presently advised and subject to hearing the parties, I will appoint a referee, being a person with commercial, valuation and accounting skill. That person will be appointed to prepare a report on the relevant issues. As I have said, the respondent is a highly professional, deeply experienced insurer, and the applicant is a skilled and experienced commercial house. The respondent has admitted the claim over 12 months ago.

47    I do not propose to permit the resolution of this commercial dispute to descend into debates about discovery driven by affidavits. This is a commercial dispute about what the appropriate sum of money is to recompense a buyer under a warranty. The parties must be in a position, after 12 months, to investigate the claim, to respond to any queries and to reasonable requests for documents and to be able to attempt to resolve this by negotiation in good faith with the provision of any documents that are necessary for that task. If, however, the matter cannot be resolved by structured negotiation, the referee whom I would consider appointing, would prepare a report as to the relevant loss, and would also have the carriage of preparing reports as to the extent necessary, and where necessary as to the need for any interlocutory processes and be responsible for overseeing any disputes about the need for documentation that the parties may assert by way of claims for discovery.

48    If the matter cannot be resolved by mediation by, say, the end of February, I will refer the matter to the referee, and subject to the referee’s availability and subject to the parties’ availability, I will require a report by the end of June 2017, if not earlier. The hearing of any adoption of that report would then take place as soon as reasonably possible after that.

49    I do not propose to make detailed orders for the preparation of the mediation. I will give the parties a period to consider the steps that I propose to take, and should there be any objection to the course that I have suggested, I will give an opportunity to the parties to deal with the matter. I do not propose to order submissions about it nor will I accept volunteered submissions. I will hear the parties through counsel’s solicitors at a mutually convenient date to be fixed next week.

I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop.


Dated:    28 November 2016