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October 2016 – Can a warranty also be a representation?

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21/10/2016

In Idemitsu Kosan Ltd v Sumitomo Co Corp [1], the claimant had purchased shares from the defendant seller.  The parties had entered into a share purchase agreement (the SPA) which contained a series of warranties by the seller.  The purchaser accepted that its claim for breach of warranty was time barred and, instead, brought a claim in misrepresentation on the basis that a claim for misrepresentation was not time barred.

The statements in the agreement on which the purchaser was founding its case were described as “warranties” with nothing in the SPA stating that they were also “representations”. The SPA, as is usual, also contained an “entire agreement” clause pursuant to which the purchaser agreed and acknowledged that it had not relied upon nor been induced to enter into the SPA by any representation or warranty other than as set out in the SPA as a contractual warranty.

Unsurprisingly, the High Court gave judgment for the seller. The Court held that where a contractual provision states only that a party is giving a warranty, that party does not (absent wording to the contrary), by concluding the contract, make any statement that it is actionable as a misrepresentation.  The Court said that it would be wrong in principle to read the warranty schedule in the SPA as though it had an existence independent of its function which was to provide content to the seller’s warranties.  The presentation of an execution copy of the SPA, complete with warranty schedule, by the seller to the purchaser, did not amount to a representation.  Even if this were not the case the purchaser’s claim would have been defeated by the entire agreement clause.

WM comment

This decision is a welcome restatement of the law. The case does highlight the importance, from a seller’s perspective of using clear language to avoid a statement being construed as a representation. A representation is a statement upon which the counterparty has relied inducing it to enter into the contract.  Sellers should therefore avoid wording that suggests the purchaser has entered into the contract in reliance upon any statements in the agreement.  A successful claim for misrepresentation may entitle the purchaser to “rescind” the contract, restoring the parties to the position they would have been in had the contract never been entered into.  This could be disastrous for the seller.  By contrast, the remedy of rescission is not available for breach of warranty.

Additionally, the basis upon which damages are assessed is different for misrepresentation and breach of warranty and there may be cases in which an aggrieved purchaser would recover more through an action in misrepresentation than for breach of contract.

Although not decisive in this case, the judgment also provides a reminder of the importance of including a well drafted “entire agreement” clause in sale and purchase agreements.

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[1] 2016] EWHC 1909 (Comm)

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