In Sycamore Bidco v Breslin & Anor (2012) the High Court considered whether express warranties in a share sale agreement also amounted to representations. Given the significantly larger sum in damages available in this case on the basis of misrepresentation, as opposed to breach of contract (£16 million as opposed to £6 million), the Claimant argued that the warranty was also a representation which was in fact false.
In November 2007, Sycamore Bidco Limited (the "Claimant") purchased a company from, inter alia, Sean Breslin, who held shares in his own right, and Andrew Dawson, acting as trustee (the "Defendants"). The Claimant paid a purchase price of over £16 million. After the sale the Claimant complained that, due to various inaccuracies in the financial accounts, the company was in fact worthless.
The share sale agreement (the "SPA") contained a number of express warranties, including a warranty that the company accounts were accurate. The warranty language included the following:
"The Vendor warrants to the Purchase[r] that, save as fairly disclosed by the Disclosure Letter, the Warranties are true and accurate in all material respects."
The Claimant issued proceedings for breach of contract and, in addition, for misrepresentation, asserting that each express warranty contained in the SPA was both a warranty and a representation.
Whilst agreements often state that statements contained within them have dual identities and are both warranties and representations, whether this is in fact the case is a matter of contractual interpretation. The distinction can be important as it affects both the types of claim which may be pursued and the remedies available. Non-performance of a warranty gives rise to a breach of contract claim, the remedy of which is based on the principle that a contract should be performed. Damages for breach of contract are therefore assessed so as to put the claimant into the position it would have been in had the contract been properly performed. A false representation, on the other hand, may give rise to a claim for misrepresentation and the contract may be rescinded or the claimant may be able to claim damages in lieu of rescission. Such damages are designed to put the claimant into the position it would have been, had the contract not been entered into. In some cases, damages in lieu of rescission are substantially higher than contractual damages. In this case, the warranty damages claim amounted to approximately £6 million; however damages for misrepresentation might have been as much as £16 million.
Mann J confirmed that, on the correct interpretation of the contract, the express warranties could not found an action for misrepresentation. The core of Mann J's judgment on this point is clear; the wording and the context of a contract determine whether a statement is a representation, a warranty, or both. Where there is no additional language to transform an express warranty into both a warranty and a representation, the statement will be interpreted solely as a warranty. The six elements of Mann J's judgment are set out below.
- The legal distinction between representations and warranties is clear and would have been understood by the draftsman of the SPA. It was also evident in the SPA as representations were referred to in one clause, and Warranties (with a capital "W") were set out elsewhere in the SPA.
- The persons giving the Warranties were described as "Warrantors" and the relevant wording in relation to the Warrantors was always in terms of Warranties.
- In order to make the wording of the warranting provision a representation, it is necessary to find something in the SPA which is capable of doing that. It is not enough that the subject matter of the warranty is capable of being a representation.
- The disclosure letter referred to in the SPA distinguished between representations and warranties by listing them separately.
- It would be "a strange and uncommercial state of affairs" for a party to negotiate detailed limitations on liability in relation to Warranties, but for such limitations not to apply to the same statements, were they to be construed as representations.
- There is a "conceptual problem" in characterising provisions in the contract as representations. Misrepresentation normally arises where a representation is made and, as a result of reliance placed on the representation, a contract is entered into by the parties. There is a logical difficulty in arguing that a term in a contract brought about the contract in which it is contained.
Mann J held that the express warranties were not representations and therefore the Claimant was awarded damages on the contractual basis.
This case provides useful guidance on how warranties and representations should be incorporated into a contract if the legal distinction is to be preserved. It is interesting to note that Mann J openly disagreed with the earlier High Court decision of Arnold J in Invertec Ltd v De Mol Holding BV (2009). In that case, Arnold J found that, inter alia, the warranties in question amounted to representations and could therefore give rise to a misrepresentation claim. Mann J's judgment also differs from that of Simon J in Bikam OOD, Central Investment Group SA v Adrian Cable (2012) who accepted that warranties could amount to pre-contractual representations where they had been exchanged in draft form prior to the execution of the agreement. It is yet to be seen whether Mann J's "conceptual problem" is shared by other judges and if his reasoning will be followed in future cases.