Warranties v Representations
SYCAMORE BIDCO v BRESLIN [2012]
In this case, the Court considered whether express warranties in a share purchase agreement could also amount to representations (statements made before a contract on which a party relies when entering into a contract). This issue arose as a much larger sum was available in damages if there had been a misrepresentation as opposed to a simple breach of contract and so the purchaser claimed that the warranty given was also a representation.
Facts:
- S paid over £16 million to buy a company from B. S then complained that the company was not worth as much as that as there were some inaccuracies in the company’s accounts.
- The share purchase agreement (‘SPA’) contained several express warranties, including a warranty that the company accounts were true and accurate in all material respects.
- S claimed for breach of contract and also for misrepresentation, stating that each express warranty was also a representation.
Decision:
- The Court said the correct interpretation of the contract meant that the express warranties could not also be treated as representations. Where there is no additional language to transform an express warranty into a warranty and a representation, it is likely that any contractual statement will be interpreted solely as a warranty.
- The Court set out some factors illuminating how it came to its decision:
- The Court believed that the clear distinction in law between representations and warranties would have been understood by the draftsman of the SPA. Representations were referred to in one clause and Warranties (with a capital "W") were referred to elsewhere.
- The Warranties were always described using only that terminology. Those giving the Warranties were described as "Warrantors". The Court could not find any reason to extend the words beyond their natural meaning. To make the relevant items a representation, something in the SPA would have to be found which was capable of doing that. It was not enough that the subject matter of the warranty was capable of being a representation.
- The limitations on liability applicable to the Warranties made no reference to representations. If the Warranties amounted to representations as well, the sellers would be deprived of a large part of their protection. The Court felt that would be a strange and uncommercial state of affairs, and cannot have been intended.
- There was a conceptual timing issue in characterising provisions in a contract as being representations. Representations are made at an earlier stage pre-contract which results in the entering into of a contract.
- S was awarded damages on the contractual basis to put it in the position as if the contract had been performed in accordance with its terms. The claim for breach of warranty came to about £6 million, being the difference between what the accounts had said the company was worth and what it actually was. If a claim for misrepresentation had been successful, S would have been entitled to be repaid its purchase price so as to put it in the same position as if it had never bought the company (about £16 million).
Points to Note:
- This case confirmed that whether a contractual statement is a representation or a warranty, or both, is a matter of contractual interpretation, depending primarily on the wording used in the context of the contract in question. The distinction here was key as it meant a difference in damages of around £10 million.
- If express warranties are intended to be actionable as representations as well, then clear wording should be included to that effect. This is why wording such as “Each party warrants and represents…” is sometimes used (emphasis added).
- Conversely, if the risk of contractual warranties being construed as representations is to be minimised, the drafting of the warranties should avoid any reference to the language of representations.
- The entire agreement clause should state that claims for innocent or negligent misrepresentation based upon any warranty or other statement contained in the agreement are excluded.
- The distinction between warranties and representations can be important as it affects the remedies available:
- a breach of warranty gives rise to a breach of contract claim, damages for which are assessed to put the injured party into the position it would have been in had the contract been performed in accordance with its terms;
- a false representation may give rise to a claim for misrepresentation (in tort) and the contract may be rescinded (cancelled). The injured party can claim damages to put it into the position it would have been in had the contract not been entered into.