24th November 2016
A common pitfall in commercial negotiations can be the incorrect or inadvertent use of terminology which has specific legal meaning and consequence. A good example of this is where one party (for example, a seller) “warrants” or “warrants and represents” something to another (say, a buyer or target) in a contract. There is an important distinction between warranties and representations in English law and whether you want to give either or both of these to your counterparty will depend on your bargaining position and will differ from case to case.
The High Court has recently highlighted this distinction in its analysis of the terms of a sale and purchase agreement (SPA) entered into in the context of an oil and gas exploration project. The case of Idemnitsu Kosan Co Ltd v Sumitomo Co Corp  therefore provides welcome clarity for all commercial contracting parties.
A warranty is a contractual promise which, if it is not true or properly performed, gives rise to a claim for breach of contract. The innocent party’s remedy for breach of contract is damages which, so far as money can do, will put that party into the position it would have been if the promise had been performed . A claim for breach of a warranty will be subject to certain limitations, for example the applicable contractual or statutory time-bar on the bringing of claims; any notification requirements or other pre-requisites to initiating a claim; and/or any contractual exclusion/limitation clauses.
By contrast, a representation is a pre-contractual statement of fact or opinion made by one party which induces the other to enter a contract. If the representation is untrue it gives rise to the right for the innocent party to set aside the contract  as if it had never been made, or for the innocent party to receive monetary compensation to achieve the same result. Whilst it may be possible for parties to place express limitations on the bringing of misrepresentation claims, it will often be in the innocent party’s best interests to pursue a misrepresentation claim as an alternative or an additional option.
Until the recent Idemnitsu Kosan v Sumitomo case, there was conflicting authority on whether and when warranties might also be actionable as representations.
The buyer argued that warranties given in the SPA were also representations capable of founding a claim for misrepresentation. (The argument was important in this case because a contractual provision precluded the bringing of a breach of warranty claim unless the claim was notified to the seller within eighteen months of completion, and the buyer had not notified its claim within that time.) The buyer asserted that expressly referring to those statements within the SPA as warranties did not derogate from their inherent quality as representations .
Summarily dismissing the buyer’s claim, the court noted:
In any event, in this particular contract, there was an ‘entire agreement’ clause under which the buyer had agreed that it had not relied on or been induced to enter the SPA by any representations or warranties other than the express and defined contractual warranties. Even if the buyer’s primary arguments had succeeded, the entire agreement clause would have defeated the claim.
There are some key practical points for contracting parties to take away from this case:
  EWHC 1909 (Comm)
 In some circumstances, if a breach is ‘repudiatory’ and goes right to the root of a contract, the innocent party may also have a right to terminate the contract, so that no new future obligations arise. Even then, however, the contract will not be undone as if it had never been completed.
 that is, to rescind the contract
 ibid para. 15