W&I Insurance in the Dutch Market

In the Netherlands, we see that Share Purchase Agreements (SPAs) will typically exclude or limit the Seller’s liability for all matters except Fraud, as the Seller generally seeks a clean exit. Against this background, subrogation rights of the Warranty & Indemnity (W&I) insurer against the Seller are often waived in Dutch law W&I-policies, which waiver does not apply in cases of Fraud.

Dutch law W&I policies are likely structured such that recourse against the Seller remains possible in the event of Fraud. Against this background, the interpretation of the term ‘Fraud’ is a key issue. A recently published judgment demonstrates how the Dutch Court interprets Fraud in the context of a W&I claim under Dutch law. This judgment offers takeaways for the W&I practice.

Recently published judgment on W&I and Fraud by the Seller

In a recently published judgment – in proceedings to which W&I insurers were involved – the Dutch Court handed down a decision in which it focuses on:

1. what was agreed regarding Fraud in the SPA;
2. the definition of Fraud under Dutch law;
3. to what extent the fraud of individuals can be attributed to the Seller as company itself, and;
4. the application to the facts specifically, whether there was fraud on the part of the Seller.

What was agreed in the SPA regarding Fraud

The SPA said in short that the Buyer’s sole exclusive resource for any breach would be against the W&I Insurers, except in case of Fraud by the Seller. The SPA held however no definition of this Fraud.

The W&I Policy mirrored the Fraud exception in the SPA, stating that W&I Insurers may subrogate if their payment arose out of Fraud by the Seller, including its Directors and Employees, as meant in article 3:44 Dutch Civil Code (DCC).

Article 3:44 DCC provides that an agreement concluded through fraud is voidable. Paragraph 3 of 3:44 DCC specifically identifies fraud as a ground for annulment.

The Court’s definition of Fraud

In this judgment the Court establishes that Fraud (bedrog) as meant in 3:44 DCC “occurs where a person induces another to perform a specific legal act by intentionally providing the other with inaccurate information, by intentionally concealing any fact the person was obligated to communicate, or by any other artifice. Representations in general terms, even if they are untrue, do not, as such, constitute fraud”.

When can Fraud be attributed to the company

The Court further focuses on the question to what extent (fraudulent) conduct of individuals can be attributed to the Seller (as a Company). The decisive factors are whether the conduct occurred in the context of the legal entity’s business, whether the individuals were acting on behalf of the entity, and whether the entity had control or should have exercised control over the relevant actions.

Application to the facts

The Court then applies these principles and holds that, in this case, there was Fraud on the part of (individuals associated with) the Seller, for the following reasons:

• The deferrals and incorrect provision for holiday accruals were deliberate actions to conceal the Group’s lower profitability in Q4 2022, not mere accounting errors.
• Statements by the Seller regarding consistency with past accounting practices and accounting approval were untrue.
• The Seller initiated the sales process, asked the Purchaser to collect information directly from the Target/Group, gave warranties without verification, and failed to check the veracity of the information.

Takeaways for the Dutch W&I Market

This judgment is significant for the W&I market because it clarifies how the Dutch court construes the concept of ‘Fraud’ in W&I context if that term is not expressly defined in the SPA.

The judgment addresses the attribution of fraudulent conduct by individuals to the Seller (the Company).

Further, the Court clearly summarizes the allocation of risks associated with a breach of warranties in this context: “(…) the risks associated with a breach of warranties were divided between risks to be covered by the W&I policy (non‑fraudulent breaches of warranties) and risks to be borne by the Seller (fraudulent breaches of warranties). (…)”.