In Sycamore Bidco Ltd v Breslin , the High Court recently considered whether express warranties in a share purchase agreement could also be the basis for an action for misrepresentation.
Although warranties and representations are often cited together within the contractual terms of a share purchase agreement, they do give rise to different remedies based upon different claims as follows:
- Representations: a representation is a statement of fact or opinion given by a party. It is usually made as a pre-contractual statement and does not form a contractual term as such (although it may, and often is, reiterated within the contract). A breach of representation may entitle the person receiving the representation to a remedy for misrepresentation and the contract may be voidable. Potential remedies include rescission (setting the contract aside and restoring the parties to their pre-contract positions) and/or damages.
- Warranties: a warranty is a contractual assurance or promise. A breach of warranty may give rise to a claim for damages only. Damages are assessed so as to put the claimant into the position it would have been in if the warranty had been performed.
The case in question concerned the acquisition of the entire issued share capital of Gissings Group Limited (“GGL”) by Sycamore Bidco Limited (“Sycamore”), a special purpose vehicle formed specifically for the acquisition, of which the majority shareholder was a private equity house.
After completion of the acquisition of GGL, Sycamore claimed that there were accounting errors in GGL’s pre-transaction audited accounts (“Accounts”). The Accounts were subject to a number of express warranties set out in the share purchase agreement (“SPA”) entered into between (1) Sycamore and (2) Mr Breslin and Mr Dawson (“Sellers”).
Sycamore sued the Sellers for breach of warranty and also asserted, in the alternative, that each breached warranty also constituted a false representation which had induced Sycamore to acquire GGL. On this alternative argument, Sycamore sought damages for misrepresentation.
The High Court held that, on the correct interpretation of the SPA, the express warranties were only warranties and did not comprise representations as such. On the particular facts of this case, the judge provided that the following points were persuasive in forming his decision:
- the drafting of the SPA drew clear distinctions between representations and warranties within that document and the respective terms were each referred to in separate clauses of the SPA;
- the language in the warranty clause contained words of warranty and not of representation. Accordingly, it was not appropriate to extend the warranty wording beyond its natural meaning on the basis that the subject matter of the warranty in question was also capable of being a representation;
- the disclosure letter referred to within the SPA distinguished between representations and warranties by listing them separately and providing that: "The disclosure of any matter shall not imply any representation, warranty or undertaking not expressly given in the Agreement…"; and
- the limitation of liability clause within the SPA referred to the “Warranties” only and not representations, which the judge considered would not have been commercial or intended if the warranties were indeed understood to be representations.
Although the judge found that the warranties did not constitute representations (and therefore there was no misrepresentation), it was held that there had been various breaches of warranty under the SPA, including the warranties given regarding the Accounts. The loss arising from the breaches of warranty was held to be the difference between the value that GGL would have had if the relevant warranties had been true (being the purchase price of £16.75m paid by Sycamore) and the actual value of GGL as at the date of the SPA (which the judge found to be £12m). It should be noted that the amount of damages awarded for breach of warranty was considerably less than the amount which might have been due for a successful claim for misrepresentation.
This case makes it clear that the question of whether a statement is a representation, a warranty, or both, is a matter of contractual interpretation on the wording and context of the relevant contract. Given the differing remedies for breach of representation and warranty respectively, it is important that contracting parties carefully consider their intentions. If the parties intend express warranties in the contract also to be actionable as representations, specific wording indicating the same should be clearly set out in the contract. Alternatively, if the parties wish to avoid warranties being construed as representations, it remains prudent to remove all references to representations from the contract and include a detailed entire agreement clause which seeks to exclude claims for innocent or negligent misrepresentation.