In its recent decision in Sycamore Bidco Ltd v Breslin1 the High Court considered whether warranties in a share purchase agreement may also form the basis of an action for misrepresentation, even if they are not expressly stated to be representations.

Why does it matter? Representations versus warranties

In short, a breach of warranty gives rise to a different remedy than a misrepresentation.

A representation is a statement of fact or opinion which is usually made before any contract is entered into. If the representation turns out to be false and the buyer relies upon the representation, the buyer may have a claim for misrepresentation. As a result the contract may be voidable and the party who was misled into making the contract can set it aside and be restored to its pre-contractual position.

In contrast, warranties are a term of a contract which, if not performed may give rise to a claim for breach of contract. The breach may allow the innocent party to terminate the contract but, unlike misrepresentation, the parties will not be returned to their pre-contractual positions. The remedy is damages which are assessed to put the claimant in the position it would have occupied had the warranty been performed.

The facts

Following a share purchase the buyer discovered accounting errors in the pre-purchase audited accounts of the target company. The buyer had relied upon these accounts to agree the transaction price, a price which was higher than it would have been if the accounting errors had not been present. The buyer made a claim for breach of warranty and alleged, in the alternative, that the breached warranties were false representations which had induced the buyer to purchase the target. The buyer sought damages for misrepresentation.

If the buyer could successfully claim misrepresentation, the buyer could potentially have recovered damages for a maximum of the consideration paid (just under £17,000,000) putting the buyer back in its pre-contractual position. However the maximum damages for breach of warranty was probably only about £6,000,000.

The decision

The court held that express warranties were only warranties, not representations. The following reasons were given:

  1. There is a clear distinction between warranties and representations in law, a distinction that would have been understood by the draftsman;
  2. warranties were always described as warranties in the contract, never as representations;
  3. it is not enough that the subject matter of the warranty is capable of being a representation. The contract would have to include some wording which extends the meaning of the warranties to include representations;
  4. the disclosure letter distinguished between the warranties and representations, listing them separately;
  5. the limitations on liability included in the contract referred to the warranties but not to representations. If the warranties also amounted to representations, on the strict interpretation of the limitations clause, any claim for misrepresentation would not be limited by the clause. The court described this as "a strange and uncommercial state of affairs, and can hardly have been intended"; and
  6. there is a timing problem as representations are pre-contractual and not in the contract itself.

The buyer was awarded damages for breach of warranty relating to the accuracy and preparation of the accounts. The damages amounted to the difference between the value of the target if the warranties had been true (i.e. the consideration) and the actual value of the target on the date of the contract. The value of the company was found to be £12,000,000 at completion so the buyer was awarded £4.75m.

In conclusion

The case demonstrates the importance of clear drafting, ensuring that a statement that is a warranty and/or a representation is clearly defined as such. A detailed entire agreement clause should also be included, excluding liability for representations not set out in the contract and limiting a buyer's remedies to contractual claim for damages.

Footnote

1. The High Court decision in Sycamore Bidco Ltd v Breslin [2012] EWHC 343 (Ch) is available at http://www.bailii.org/ew/cases/EWHC/Ch/2012/3443.html.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.