Representations and warranties insurance – Court of Appeal decision will impact coverage analysis

8 minute read
28 February 2023

The Ontario Court of Appeal's decision in Boliden Mineral AB v FQM Kevitsa Sweden Holdings AB, 2023 ONCA 105 interprets the representation and indemnity provisions in a share purchase agreement (SPA). While the decision does not address representations and warranties insurance (RWI) itself, the interpretation of representation and indemnity provisions in an SPA is central to the coverage analysis for RWI.

The key takeaways from the decision are:

  • Representations that confirm a state of affairs (as opposed to the representor's belief about the state of affairs) are breached if the state of affairs is not as represented.
  • The reasonable foreseeability of consequential and indirect losses will be interpreted according to the applicable common law if the SPA does not specify otherwise.
  • The proper application of the reasonable foreseeability of loss test does not consider whether the breach was likely or unlikely, but rather the reasonable foreseeability of the losses flowing from the breach if it did occur.


FQM sold the shares of Kevitsa (a Finnish mining company) to Boliden for US $712 million. In the SPA, FQM represented and warranted that with respect to the period up to closing, Kevitsa had filed all required tax returns and that they were "complete and correct in all material respects", all taxes due and payable had been paid except for contested amounts disclosed and provided for in Kevitsa's financial statements, there was no audit underway or discussion ongoing with any tax authorities, and "[t]here are no grounds for the reassessment of the Taxes of [Kevitsa and its subsidiary]".

There were two indemnity provisions in the SPA. Under the first one, FQM was required to indemnify Boliden and Kevitsa for any losses arising from a breach or inaccuracy of the representations and warranties. The term losses was defined to include any loss, damage, penalty, tax, or interest, and specified that consequential or indirect loss was an indemnifiable loss to "the extent it is a reasonably foreseeable consequence of the event or circumstance constituting the ground for the applicable indemnification obligation". Under the second indemnity provision, FQM was required to indemnify Boliden and Kevitsa against "any Taxes required to be paid or remitted by [Kevitsa] … with respect to any Pre-Closing Tax Period".

At the time of closing, it was unknown if Kevitsa would have any tax loss carry-forwards because under Finnish law, all tax loss carry-forwards are forfeited upon a change of control. After a change of control, a company can apply to use the pre-closing tax losses. In the present case, Kevitsa successfully applied to use the pre-closing tax losses.

After the SPA closed, the Finnish tax authorities commenced an audit of Kevitsa that resulted in an increase in taxes owed by Kevitsa for multiple years prior to closing. Kevitsa was able to use accumulated tax losses to offset much of the increased taxes for the pre-closing period. However, because Kevitsa effectively "used up" its tax losses to offset its pre-closing taxes, it was unable to use those tax losses to offset its tax liability in post-closing periods.

The application judge determined that FQM had breached its tax representations and warranties and that it was liable to indemnify the respondents for Kevitsa's tax liabilities arising from the tax audit, as well as for the loss suffered as a result of Kevitsa not having tax loss carry-forwards to use post-closing. FQM appealed.


The Court of Appeal dismissed the appeal.

FQM's first ground of appeal was that the application judge failed to consider the representation and warranty's accuracy as at the date of closing, but rather interpreted it in light of future event. FQM submitted that representations speak as at the time they are made and are not actionable simply because a subsequent event rendered them no longer true (citing Beatty v Wei, 2018 ONCA 479). FQM argued that the representation and warranty (that there were no grounds for reassessment) was true at the time of closing, and that grounds for reassessment only arose due to the Finnish tax authorities post-closing reinterpretation of tax legislation.  

The Court of Appeal disagreed, noting that unlike other representations and warranties in the SPA, the representation and warranty at issue was not qualified in any way (i.e. it was not limited to the knowledge of the sellers). The parties were all aware at the time of closing that there was a possibility that a reassessment of Kevitsa's tax liability could occur after the SPA was concluded. When the reassessment occurred and was the result of grounds that existed at the time of closing, the representation and warranty became false and the right to indemnity was triggered.

FQM's second ground of appeal was that the application judge erred in interpreting the requirement of reasonable foreseeability of consequential or indirect losses based on the common law. The Court of Appeal explained that at common law, "losses are reasonably foreseeable if they would follow from a breach of the contract in the ordinary course of things or if they would be expected to so follow by the parties at the time of contracting by virtue of their special knowledge". FQM argued that not only was the tax reassessment not reasonably foreseeable, but since the accumulated tax losses were not transferred or paid for as part of the transaction, there was significant uncertainty about whether they would be available post-closing such that not having the ability to use them post-closing was not a reasonably foreseeable loss.

The Court of Appeal disagreed, noting that the parties had chosen Ontario law to govern their rights and duties under the SPA and it was reasonable for the application judge to interpret the term "reasonable foreseeability" using Ontario common law. Further, the Court of Appeal explained that the proper application of the reasonable foreseeability test does not consider whether the breach (i.e. the reassessment) was likely or unlikely. Rather, the test considers the reasonable foreseeability of the losses flowing from the breach if it did occur. The Court of Appeal held that it was open to the application judge to conclude that it was reasonably foreseeable that Kevitsa would apply to reinstate the accumulated tax losses and that they would be reinstated. Having been used to pay taxes in the pre-closing period, the tax losses were not available for use post-closing, resulting in a loss for the purposes of the indemnity in the SPA. The Court of Appeal did not consider the second indemnity, since the loss was recoverable under the first indemnity.

Application to R&W Insurance

It is not uncommon for RWI to cover tax representations, and the Court of Appeal's decision is instructive about how both the representation and warranty provisions, the indemnity provisions, and the definition of loss in share purchase agreements will be interpreted. Underwriters will need to continue paying close attention to whether tax representations and warranties are qualified by knowledge or not, since without qualification they are akin to a guarantee. Likewise, underwriters will need to remain vigilant in considering the definition of loss that they are adopting in the RWI policy, and whether any modifications are needed to ensure that it reflects the intended scope of indemnification under the policy. Finally, underwriters are cautioned to remain keenly aware of governing law provisions in SPAs, as the common law in that jurisdiction may be determinative in the interpretation of critical provisions like the definition of loss.

Should you have any specific questions about this article or would like to discuss it further, you can contact the authors or a member of our Insurance & Professional Liability Group.

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