GENERAL CORPORATE

Contractual warranties do not automatically amount to representations

The High Court has held in Idemitsu Kosan Co., Ltd v Sumitomo Corporation [2016] EWHC 1909 (Comm) that a contractual warranty did not automatically amount to a representation.

Legal background

A warranty is a promise made in a contract by one party to another. A representation is a statement of fact made by one person which induces another person to enter into a contract.

Damages for brach of contract and for misrepresentation are calculated differently. This calculatin can be huge amd complex, and it is not always clear which claim will provide greater damages. However, the general perception is that a claim in misrepresentation is fabourable to a buyer.

Facts

On 12 November 2009, Idemitsu acquired the shares in Petro Summit Investment UK Limited from Sumitomo. The sale agreement (“SPA”) contained warranties by Sumitomo. Importantly, each statement was described in the SPA as a warranty, but not as a representation.

Just over seven years later, Idemitsu discovered a dispute which rendered a warranty untrue. Under the terms of the SPA, Idemitsu was time-barred from bringing a warranty claim against Sumitomo.

However, Idemitsu argued that the warranty also amounted to a representation, and that the time limit in the SPA did not apply to claims in misrepresentation. Idemitsu also argued that, by providing an execution copy of the SPA to Idemitsu, Sumitomo had made pre-contractual representations to Idemitsu in the same form as the warranties in the SPA.

Decision

The High Court dismissed the claim. It said that a warranty contained in a contract does not automatically amount to a parallel representation. Rather, a representation needs to be communicated before the contract is concluded.

It is possible for language used in negotiation communications or a draft contract to amount to a pre-contractual representation that later forms the basis of a misrepresentation claim. However, there must be an actual communication to this effect from the seller to the buyer before the SPA is concluded.

In this case, Idemitsu was asking the court to "divorce" the entire warranty schedule from the rest of the SPA so as to characterise the contractual warranties as pre-contractual representations.

The court felt that this would be artificial and wrong in principle. The purpose of the schedule was to give content to the warranties in the SPA, not a series of parallel representations. By providing an execution copy of the SPA to Idemitsu, Sumitomo was not making pre-contractual representations, but merely showing it was willing to give certain contractual promises in the SPA, once executed.

Comment

The case helps to clarify conflicting case law on this point. Previously, the High Court had held (Invertec Ltd v De Mol Holding BV [2009] EWHC 2471 (Ch)) that a contractual warranty can also amount to a representation.

However, more recently it held (Sycamore Bidco Ltd v Breslin [2012] EWHC 3443 (Ch)) that a contractual warranty in an SPA cannot amount to a representation due to timing issues: a representation must be made before a contract is entered into, but the warranties in an SPA are made only at the time the SPA is concluded. The decision in Idemitsu further solidifies this principle.

The case creates difficulties for claims where the SPA does not state that the warranties are also representations. In these circumstances, buyers should probably regard their chances of successfully bringing a misrepresentation claim based on the content of the warranties as highly unlikely.

Even where the SPA does state that the warranties are representations, the position is not clear. The cumulative effect of Sycamore Bidco and Idemitsu appears to be that a buyer must show that: (i) the statement in question was actually made by the seller before the parties entered into the SPA; and (ii) the buyer was in fact induced to enter into the SPA by that statement.

The case also deepens the divide between UK and US practice. SPAs under US law usually state that the warranties are also representations. This may be appropriate in some cases, as the nature and consequence of a misrepresentation under US law can be quite different from those under English law.

However, this has perhaps created an expectation by US organisations that warranties in an English SPA should also act as representations. This is at odds with what now appears to be market practice in the UK. US buyers will therefore need to understand the nature of representations in an English SPA and the likelihood of being able to bring a misrepresentation claim later down the line. 

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