Warranties vs representations

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Warranties vs representations

14 Oct 2016

The recent decision of the High Court in Idemitsu Kosan Co Ltd v Sumitomo Co Corp provides clarity upon whether contractual warranties, given by a seller to a buyer in a Sale and Purchase Agreement (SPA), are capable of founding an action for both breach of contract and misrepresentation . . .

What are the differences between warranties and representations?

On the sale of a business or a company, a seller will usually be expected to provide a buyer with certain warranties in the SPA. These are contractual assurances on the target business/company and its assets and liabilities, breach of which may give rise to a claim against the seller.

If any warranty is not true and accurate (and to the extent the matter has not been disclosed to the buyer), the buyer may (subject to the agreed terms of the SPA) make a claim against the seller for breach of contract. The buyer’s remedy in such circumstances would be damages, assessed so as to put the buyer into the position it would have been in had the warranty not been breached by the seller.

Misrepresentation is a separate cause of action for a buyer from breach of contract and the remedies available can be more onerous. An actionable misrepresentation is a false statement of fact from a seller which a buyer relies on in entering into the SPA. The principle in respect of misrepresentation is that a party who is misled into entering a contract can set it aside and essentially undo it, with the parties each being returned to the position they were in pre-contract. Remedies available do differ depending on whether the misrepresentation is made fraudulently/negligently or innocently.

Most often, where the misrepresentation is innocent, damages are awarded as an alternative to the contract being set aside, but on a basis which is different to that used for breach of contract. The key difference is that damages for misrepresentation are restitutionary in nature and designed to put the buyer in the position it would have been in had the contract not been entered into. A misrepresentation action consequently protects a buyer who has overpaid and entered into a “bad bargain” (whereas the contractual measure of damages instead looks at the market value of the shares/assets acquired had the warranty not been breached, versus the market value in light of the breach).

Clarifying through case law

Conflicting case law had previously caused some element of confusion as to whether warranties were in fact just that – giving rise to an action for breach of contract – or if they could also be considered to be representations, giving rise to a separate cause of action/measure of damages.

Whether a contractual provision amounts to a representation, warranty, or both, will always be a matter of interpretation of the contract terms, based on the context of the contract in question and the specific wording used therein.

However, the verdict in the recent Idemitsu case does provide sellers with some element of comfort, insofar as it affirms that buyers are likely to face difficulty in successfully arguing that warranties in an SPA are also actionable representations, unless the SPA expressly provides for this to be the case (in so many words or in effect).

General practice

From a buyer’s perspective, if a buyer wants to preserve a right to bring an action for misrepresentations, this should be explicit in the SPA. However, general practice in the UK (other jurisdictions differ) is that sellers successfully resist this stance, given that contractual warranties ultimately provide the buyer with an appropriate and proportionate remedy for breach of a negotiated contract.

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