What constitutes a warranty or a representation in the context of an oil and gas sale and purchase agreement is often the source of much negotiation within the transaction documents. The recent case of Idemitsu Kosan., Ltd v Sumitomo Corporation [2016] EWHC 1909 has emphasised the importance of clarity in drafting if representations (and not merely warranties) are to be included within the agreement.

Background and Facts

In late 2009, Sumitomo Corporation (“Sumitomo”) and Sumitomo Corporation Europe Limited (together the “Sellers”) entered into an agreement to sell their jointly owned subsidiary, Petro Summit Investment UK Limited (“Target”), to Idemitsu Kosan., Ltd for around $575m (the “SPA”).

As is normal practice in agreements governing the transfer of the shares in (or assets of) oil and gas exploration and production companies, the SPA provided that the Sellers warrant numerous matters relating to the Target (including various statements as to its activities, its liabilities and finances).

Specifically, the SPA stated that “Each of the Sellers warrants to the Buyer in respect of itself and its Relevant Shares in the terms of the Warranties in paragraph 1 and 2 of Schedule 4”. “Warranties” was defined as “the warranties (emphasis added) given by (i) Sumitomo in Schedule 4 and Part 2 of Schedule 7; and (ii) SCE in paragraph 1 and 2 of Schedule 4”.

As a result of the various issues affecting two oil fields, Idemitsu contended that certain matters warranted under the SPA were not true on the date of its signing. However, as the SPA contained provisions specifically limiting the liability of the Sellers in relation to, inter alia, warranty claims brought after a certain period (18 months in the case of the warranties at issue), Idemitsu accepted that it was time barred from making a claim for breach of warranty.

Instead, Idemitsu raised a claim against Sumitomo in the Commercial Court claiming damages for misrepresentation in tort and under s.2(1) of the Misrepresentation Act 1967, in essence claiming that the warranties given by Sumitomo under the SPA could be construed as representations.

Decision

The Commercial Court decided that the warranties did not amount to representations and therefore Idemitsu’s claim must fail. 

In reaching this conclusion the Commercial Court analysed the provisions of the SPA and the parties’ dealings in concluding the bargain to ascertain (a) the precise nature of the warranties given by the Sellers and whether they did in fact amount to representations, and (b) whether the Sellers’ conduct in presenting an Execution Copy of the SPA, offering to sign and thereafter signing it amounted to a representation of the facts (capable of being actionable as misrepresentations) contained within the SPA. 

The Commercial Court began by setting out the basic and important premise that: 

“When a seller, by the terms of the contract under which he sells, "warrants" something about the subject matter sold, he is making a contractual promise. Nothing less. But also I think (and all things being equal) nothing more… By contracting on terms by which he warrants something… He is making a promise, to which he will be held as a matter of contract in the sense that any breach of the warranty will be actionable as a breach of contract”.

The Commercial Court followed the decision of Mann J in Sycamore Bidco Ltd [2012] EWHC 3443 (Ch)(thereby rejecting the conflicting authority of Invertec Ltd v (1) De Mol Holding BV, (2) Henricus Albertus de Mol [2009] EWHC 2471 (Ch)). In Sycamore the relevant terms of the SPA were materially similar to those in the present case. In Sycamore the court found that a warranty could not be a representation when the claimant relied purely on the warranties contained in the contract as amounting to the representations. The court set out Mann J’s reasoning in Sycamore for this conclusion with which the court concurred:

  1. There is a clear distinction in law between representations and warranties which would be understood by the draftsman of the SPA. The wording and structure of the SPA demonstrated that it was apparent from the SPA itself that the warranties could not be representations as representations were referred to in a specific clause while “Warranties” (with a capital “W”) were referred to elsewhere in the contract.
  2. Warranties were strictly described as warranties and nowhere in the SPA were they described as representations. Further, the SPA designed those giving the warranties as “Warrantors” (again with a capital “W”).
  3. When given their natural meaning the words of the warranty provision were words of warranty not representation.
  4. The Disclosure Letter (referred to in the SPA) distinguished between representations and warranties — “The disclosure of any matter shall not imply any representation, warranty or undertaking not expressly given in the Agreement …”
  5. Clause 8 of the SPA contained “significant limitations on liability” in respect of the warranties. Thus significant protections would have been lost by the Warrantor under the “Warranties” and again there was no reference to representations.
  6. There was a conceptual problem in characterising provisions contained within the contract as being representations relied upon in entering into the contract. In an archetypal misrepresentation claim the representation occurs prior to entering into a contract. It is the representation itself that is then said to induce a party to enter into the contract.

For the above reasons the Commercial Court found that Idemitsu’s stated claim was bound to fail.

Idemitsu also sought to bring a claim that pre-contractual representations were indeed made to Idemitsu. Idemitsu relied upon the provision of a draft Execution Copy of the SPA to argue that it had relied upon the words therein and been induced to enter into the SPA by Sumitomo “(i) providing the Execution Copy as the contract to be signed by both parties; (ii) offering to sign the Execution Copy; or (iii) signing the Execution Copy”. The representations that were alleged to have been made were in the statements of facts contained in Clause 6.1 (Warranties) and Schedule 4 (Seller’s Warranties) of the Executed Copy of the SPA. Idemitsu argued that Schedule 4 should be read as a series of factual statements. 

The Commercial Court however rejected this argument deciding it would be “artificial and wrong” to read Schedule 4 in isolation and independent of its function which was to provide content to the warranties contained within the SPA. The Commercial Court, again preferring the Sycamore line of authority over Invertec (where Chancery Division found the Buyer had prior knowledge of the content of warranties from contract negotiations), reiterated Mann J’s judgment which referred to this prior knowledge point stating, “What the warrantors…knew they were providing, were expressed to be warranties, not representations.” The Commercial Court in this case therefore concluded that the “Execution Copy communicated, so far as material, no more than a willingness to give a certain set of contractual warranties in a concluded contract.”

Comment

The extent of contractual warranties and representations are often hard fought elements of any negotiation concerning a sale and purchase agreement in the oil and gas industry. Their inclusion will often coincide with limitations on time periods within which a claim may be made, and might include limitations on the extent of any liability.

Where it is the parties’ intention that contractual representations should be made in the sale and purchase agreement, it is common for the seller to ‘warrant and represent’ certain facts and matters. This might be done through the use of the word ‘represent’ proceeding the representations given or in the defined terms of the agreement (such as the definition of “Warranties” if the representations and warranties are identical).

In the absence of clear drafting that specifically imports representations into the sale and purchase agreement, the Idemitsu case suggests that English law will not generally interpret warranties as amounting to representations. If a party wishes to provide that a breach of a warranty may also found an action for misrepresentation it would be wise to draft the sale and purchase agreement to make this clear from the natural and ordinary reading of the agreement.

It also appears that the representation arguments put forward by Idemitsu were a ‘last resort’ attempt at bringing a claim against Sumitomo. Idemitsu were contractually barred from raising claims for breach of warranty due to a “limitation of liability” provision imposing an 18 month time limit for bringing such claims. Contracting parties should ensure that if time limits for bringing claims are to be contractually agreed then the deadlines for bringing such claims should be kept at the forefront of one’s mind. Where possible, action should be taken well in advance of these deadlines if contracting parties are to avoid this type of scenario.

Idemitsu Kosan Co., Ltd v Sumitomo Corporation [2016] EWHC 1909 (Comm)