Contractual warranties do not automatically amount to representations
The High Court has held in Idemitsu Kosan Co., Ltd v Sumitomo Corporation  EWHC 1909 (Comm) that a contractual warranty did not automatically amount to a representation.
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.
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.
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.
The case helps to clarify conflicting case law on this point. Previously, the High Court had held (Invertec Ltd v De Mol Holding BV  EWHC 2471 (Ch)) that a contractual warranty can also amount to a representation.
However, more recently it held (Sycamore Bidco Ltd v Breslin  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.
Meeting to approve scheme of arrangement can be held without including shareholders who agree to be bound by the scheme and excluded from voting.
We have advised Altria Group, Inc., the largest shareholder in SABMiller plc, on an application by SABMiller to court to convene a meeting of shareholders for the purpose of approving the scheme of arrangement element of the takeover.
The application was made on the basis that Altria and another major shareholder agreed to be excluded from attending and voting at the court-convened meeting to approve the scheme, on the basis that they had agreed via separate undertakings to be bound by the scheme, if approved.
The application was successful and sets new legal precedent for schemes of arrangement. The court decided that Altria and the other shareholder did not need to attend the courtconvened scheme meeting, and that neither the company nor the shareholders were prejudiced by the proposal.
Duty to Report Payment Practices
The Government has announced that it intends to lay regulations to give effect to section 3 of the Small Business, Enterprise and Employment Act 2015 in early 2017.
The purpose of that section is to require large private companies, large LLPs and large quoted companies to report on payment practices on a bi-annual basis. Reports will be uploaded to a digital, public platform. Information that will be made available includes standard payment terms, time taken to pay invoices, and interest paid / owed on late payment.
The Department for Business, Energy and Industrial Strategy has since advised that it still expects the regulations to be laid by early 2017, and that it expects the duty will come into force on 6 April 2017, applying to financial years starting on or after that date.
Updated guidance on directors’ remuneration reporting
The GC100 and Investor Group have published an updated edition of their directors’ remuneration reporting guidance. The new guidance replaces the previous 2013 version. Key changes to the guidance concern:
- The degree of discretion to be exercised by remuneration committees where a director’s individual performance is not commensurate with the company’s overall financial performance.
- More detail on when companies might refrain from disclosing performance measures or targets in their remuneration report on the grounds of ‘commercial sensitivity’.
- Which persons should be included in comparator groups when reporting on shifts in the CEO’s remuneration.
- The level of each executive director’s remuneration that should be stated in the company’s future policy table, which should be the maximum amount for each component of remuneration.