The recent case of Sycamore Bidco Ltd v Breslin and Dawson [2012] offers a useful reminder of the main differences between warranties and representations in the drafting of the contracts for the sale of companies. The court decided that whether a contractual term is a warranty or a representation will depend on the drafting of the contract, so it is important to ensure that this issue is addressed during the negotiation process, particularly as the buyer of the company could be entitled to claim significantly higher damages from the seller in the event of a breach of contract.

What are warranties and representations?

A warranty is a term of the contract under which the seller makes various statements about the state of the company. If these statements later prove to be untrue, the buyer may have a claim for breach of contract. The remedy is to put the buyer into the position he would have been in had the warranty been properly performed. That is, to claim the difference between what he paid for the company and what the company is actually worth if the warranty in question is untrue.

A representation is a statement of fact or opinion (which is normally pre-contractual) which is relied upon by the buyer and induces him to enter into the contract. If it is false, the buyer may have a claim for misrepresentation and the contract may be voidable. This means that the buyer, having been misled into making the contract, may set it aside, so that the contract is undone and both parties are restored to their pre-contract positions.

Warranties and representations in an acquisition context

Warranties given by the seller are a fundamental part of the sale and purchase agreement as the buyer will be relying on these when acquiring the seller's company or business. The buyer will often attempt to expressly provide in the contract that the warranties given by the seller are also representations in order to increase the range of remedies available in the event of breach. However, this should be strongly resisted by the seller.

Considerations for the buyer v the seller

Sellers should ensure that any representation language should be removed from the agreement and a clause should be included to exclude claims for innocent or negligent misrepresentation and limit the buyer's remedies to a contractual claim for damages. A clause should also be inserted stating that the parties have not relied on any oral or written representation not contained in the agreement and waive any rights not conferred by the agreement.

Buyers should ensure that any warranties given by the seller should also be drafted as representations in order to increase the range of remedies available to the buyer in the event of a breach. An express provision should be provided to indicate that the seller has made representations in the terms of the warranties which have induced the buyer to enter into the contract.