In a recent High Court case, Sycamore Bidco Ltd v Breslin (2012), it was alleged that a contractual warranty could also give rise to an action for misrepresentation. This case highlights the need for care when drafting share purchase agreements.
In this case, following completion of a share purchase, the buyer (Sycamore) discovered what it considered to be accounting errors in the audited accounts on which it had relied when agreeing the price for the target company resulting in an inflated purchase price.
The share purchase agreement (SPA) contained the usual warranties in respect of the quality of the accounts, including that they showed a true and fair view of the company affairs and that they were prepared in accordance with generally accepted accounting principles. The seller’s liability under the warranties was limited.
Therefore, as well as suing for breach of warranty, the buyer claimed, in the (preferred) alternative, that the breached warranty was also a false representation that had induced it to buy the target company. Any liability for misrepresentation was not expressly limited in the SPA.
A reminder of the difference
A warranty is a contractual statement or assurance as to the condition of a company, business or asset. If untrue, the buyer may have a claim for breach of contract, the remedy for which is damages calculated on the basis of putting the claimant into the position it would have enjoyed if the warranty had been true.
A representation is a statement of fact or law made by a party which induces the other to enter into a contract. If untrue, and the claimant shows that it relied on the false representation and was induced by it to enter into the contract, the potential award for damages may be higher as it will be calculated in the basis of restoring the parties to their pre-contract positions (as if the misrepresentation had never been made).
Representations and warranties are often confused, possibly because many clauses begin with "The seller represents, warrants and undertakes...", followed by a series of sub-clauses commonly referred to as "the warranties".
The crucial distinction is that warranties and representations is the different basis on which damages are measured. In the Sycamore case, the difference between the lower, breach of contract damages, and the higher, misrepresentation damages, was estimated to be more than £10m.
The judge held that the express warranties were not capable of supporting a claim for misrepresentation on the basis that:
- the clear distinction between warranties and representations would have been understood by the draftsman of the agreement and this was apparent in the agreement (by use of a capital “W” for “Warranty”),
- the warranties were clearly and at all times described as warranties, not representations,
- the words used in the operative warranty provision were typical of warranties and did not include words of representation (i.e. the sellers "warranted" but did not "represent and warrant"). In order to constitute a representation there would need to be something to construe to that effect in the agreement. It was 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 warranties and representations by listing them separately,
- the SPA contained warranty limitation provisions which did not refer to representations. It would have been a “strange and uncommercial state of affairs” and unlikely to be in line with the parties intentions if the warranties had amounted to representations, but were deprived of their limitation,
- as the representation would have been only given in the contract itself, it did not sit with the usual case of misrepresentation where a party is induced by it to then enter into the contract. The timing therefore did not work.
The case is an important reminder of the distinction between warranties and representations, and provides a useful indication of the approach to be taken by courts when dealing with this matter.
The question of whether a statement is a warranty, a representation or both, will depend on the wording used and the context of the contract in question. If the parties intend express warranties in an agreement to also be actionable as representations, clear wording should be included to that effect.