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When Statements of Fact are no longer Statements of Fact – Warranties or Representations?

Anyone that has been involved in a corporate acquisition will be aware of the need for the Seller to provide Warranties on matters related to the Target.  If it later transpires that any of the matters warranted are untrue, the breach of warranty will entitle the injured party to claim damages from the seller to compensate it for the breach.  The damages aim to put the receiving party in the position it would have been in had the contract been properly performed.  However, a disgruntled buyer might prefer to rescind the contract; that is, to undo the transaction entirely and ask the Court to set the contract aside and award damages to put it in the position it was in before the contract was entered into as though the contract had never existed.

Whilst rescission is a remedy that is available for misrepresentation, it is not a remedy that is available for breach of warranty.  Consequently, it is for this reason (amongst others) that parties have often sought to argue that a warranty given within a contract, or a draft copy of that warranty provided before the date the contract is entered into, is in fact a representation. 

To date there has been conflicting case law as to whether it is possible for warranties in a Share Purchase Agreement (“SPA”), expressed only to be warranties, to also amount to representations capable of founding an action for misrepresentation under the Misrepresentation Act 1967.  The recent Commercial Court case of Idemitsu Kosan Co Ltd v Sumitomo Corporation [2016] EWHC 1909 (Comm) has reconsidered the issue as to whether a warranty given within a contract, or a draft copy of that warranty provided before the contract is entered into, can constitute a misrepresentation for a claim in common law or under the Misrepresentation Act 1967.

The Arguments

A representation is a statement of fact (or opinion) given by one party to the other before a contract is entered into.  If a party relies on that statement which turns out to be incorrect, the party may bring a claim for misrepresentation.  Idemitsu argued that although a number of statements made were expressed as being warranties, those statements were nevertheless statements of fact and therefore capable of being representations.  Further, Idemitsu argued that nothing in the SPA prevented the statements relied upon being representations or excluded liability for a misrepresentation claim.

The Decision

The court dismissed Idemitsu’s claim in a judgment that suggests buyers are likely to face some difficulty in successfully arguing that the warranties in an SPA are also actionable in misrepresentation if the SPA does not expressly provide (in so many words or in effect) that the warranties are also to take effect as, or be treated as, representations.

Whilst the law is not entirely certain at the moment, it would appear that a warranty alone, either as part of a contract or in pre-contractual negotiations, is unlikely to be able to support a claim in misrepresentation.

Conclusion

This case appears to suggest that buyers are likely to face difficulties in arguing that terms expressed solely as warranties in an SPA are capable of amounting to representations.  Notwithstanding this, the determination as to whether a contractual provision amounts to a representation, a warranty, or both will always fall to be determined as a matter of contractual interpretation, depending on the wording and the context of the contract in question.

Often the buyer will draft the SPA on the express basis that the warranties given by the seller are also representations.  This is in an attempt to give the buyer parallel remedies in both contract and the tort of misrepresentation if it transpires that any of the matters warranted are untrue.  This decision is a reminder that, from the seller's perspective, one of the best defences to the risk of any inaccuracies in its warranties giving rise to parallel claims in contract and the tort of misrepresentation lies in ensuring that the SPA contains a comprehensive entire agreement clause as well as being drafted to exclude any liability for misrepresentation (to the fullest extent permitted by law), whether arising from pre-contractual statements or the terms of the SPA itself.

Ultimately, the ability to remove any such ambiguity in either parties favour will depend on the negotiating strength of the parties but the case is a reminder for sellers and buyers to ensure that the drafting reflects the intended allocation of risk.

Posted on 12/05/2016 by Ortolan

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