In Idemitsu Kosan Co, Ltd v Sumitomo Corporation  EWHC 1909 (Comm) the court clarified what constitutes a warranty, including its ability to be construed as a representation of fact for the purposes of bringing a claim under Section 2(1) of the Misrepresentation Act 1967. In doing so it applied the first-instance decision in Sycamore Bidco Ltd v Sean Breslin  EWHC 3443 (Ch).
The court found that Idemitsu's claim that Sumitomo had induced it to enter into a share purchase agreement by making false representations contained in certain warranties in the agreement had no prospect of success. The warranties in question were warranties as opposed to representations and nothing more.
Idemitsu Kosan Co, Ltd entered into a share purchase agreement on November 12 2009 (SPA) with Sumitomo Corporation and its wholly owned subsidiary, Sumitomo Corporation Europe Limited, to acquire the entire allotted and issued share capital of Petro Summit Investment UK Limited, subsequently renamed Idemitsu Petroleum UK Limited (Company).
Schedule 4 to the sale and purchase agreement contained a number of warranties relating to the company.
Idemitsu later discovered that the company, which had interests in offshore gas and oil fields, was subject to substantial liabilities arising from a dispute over the operating expenses of a floating production storage and offshore loading vessel. However, under the sale and purchase agreement, Idemitsu could bring a breach of warranty claim only if it had notified the claim to Sumitomo within 18 months of completion. In the particular circumstances Idemitsu's breach of warranty claim was time barred.
Idemitsu instead brought a claim against Sumitomo for damages for misrepresentation under Section 2(1) of the Misrepresentation Act 1967 claiming that the warranties also amounted to representations made by Sumitomo.
According to Idemitsu, Sumitomo had made representations in the terms of the statements contained within the warranties and in order to induce Idemitsu to enter into the sale and purchase agreement. Sumitomo applied for summary judgment on the ground that the claim had no real prospect of success.
Following this, and on the suggestion of the judge, who sought clarification of the argument advanced, Idemitsu applied to amend its particulars of claim. In the reformulated claim, Sumitomo allegedly misrepresented statements to Idemitsu by:
- including certain statements as matters to be warranted in a final document marked for signature as the "Execution Copy" of the sale and purchase agreement;
- offering to sign the execution copy; and/or
- signing it (first).
Idemitsu claimed approximately $105.9 million in losses.
The questions before the court, therefore, were:
- whether Idemitsu's claim had a real prospect of success at trial; and
- if not, whether there was any other compelling reason why it ought to be disposed of at a trial.
Sumitomo was granted summary judgment. In reaching its decision the court considered the following issues.
What were the warranties?
In general terms, a warranty is a contractual term or promise that comes into existence once the agreement has been concluded. A representation, by contrast, is a pre-contractual statement.
The court was satisfied that, on their face, the terms were warranties and were clearly identified and defined as such in the sale and purchase agreement; they were promises as to past or present facts relating to the company. However, the court questioned whether they could also be representations, whether prior to completion or after.
Were the warranties capable of founding a claim in misrepresentation?
The court differentiated between the making of a statement and a party's promise that the statement is true, and referred to conflicting authority at first instance.(1) It agreed with the judge's stance in Sycamore Bidco that, as a matter of principle, these two propositions are generally distinct.
It observed that to make relevant material a representation, it is necessary to find evidence in the sale and purchase agreement to suggest some intention of that being case. It is not enough that the subject matter of a warranty is capable of being a representation. Schedule 4 was not a standalone set of statements of fact either; it was the agreed means through which the parties together chose to define the content of the warranties and so could not be divorced from the rest of the agreement and used by itself to establish a set of representations.
In the circumstances there was nothing in the sale and purchase agreement to suggest that the parties had intended to make representations by the content of the warranties. Those drafting the agreement would have been aware of the distinction. This was a commercial transaction conducted at arm's length. The parties were sufficiently sophisticated to have known that what were provided in the sale and purchase agreement were warranties, not representations, and would have been well advised in this respect.
The circumstances were thus distinct from those in Bikam OOD,(2) for example, where 'sellers' warranties' were defined as "the representations and warranties of the Sellers".
Were the warranties in the execution copy representations?
In light of the fact that nothing in the sale and purchase agreement suggested an intention that the warranties should also be representations, it would be artificial to infer this intention by virtue of Sumitomo:
- including the matters as matters to be warranted in a final document marked for signature as the "Execution Copy" of the sale and purchase agreement;
- offering to sign the execution copy; or
- signing the execution copy.
Sumitomo's actions demonstrated nothing more than an intention to conclude the agreement on certain terms as set out in the execution copy (Eurovideo Bildprogramm,(3) distinguished).
Were there any contractual defences to save the claim?
There were no contractual defences to save the claim. A detailed entire agreement clause in the sale and purchase agreement made it clear that, among other things, any pre-contractual understandings, communications or representations had not been relied on or had been withdrawn upon completion.
Clause 12.12.3(a) of the entire agreement clause stated that Idemitsu "has not relied on, or been induced to enter into, this Agreement by any representations, warranties or undertakings of any kind other than the Warranties". Idemitsu tried to contend that this implied that the warranties could be representations. This was again an artificial, forced interpretation. In any case, it was irrelevant given that the entire agreement clause excluded reliance upon representations.
Idemitsu's claim therefore had no real prospect of success. There being no other reason why the court believed it should be disposed of at a trial, summary judgment was granted for Sumitomo.
This case highlights the crucial importance of clear drafting of warranty and entire agreement clauses, which here came to the aid of Sumitomo. It is also a salutary reminder of the need to bring contractual claims within the applicable limitation periods to avoid having to construct ambitious extra contractual claims.
For further information on this topic please contact Maria Petzsch or Geraldine Elliott at RPC by telephone (+44 20 3060 6000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
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