Case Study – Reps and Warranties – does it matter?
In the recent case of Sycamore Bidco Ltd v Breslin and another  EWHC 3443 (Ch) the High Court considered whether breach of express warranties in the share sale agreement (‘SPA’) could amount to an action for misrepresentation. In particular, this case confirms that determination of whether a statement is deemed to be representation or warranty hinges on the mechanics of contractual interpretation. It is therefore crucial that contracting parties appreciate the difference between warranties and representations in a share sale agreement.
Sycamore Bidco Ltd (the ‘Buyer’) purchased shares in Gissing Advisory Services Ltd (the ‘Company’), a subsidiary of the Gissings Group (the ‘Seller’). The Seller provided express warranties in the SPA in respect of the accuracy of accounts of the Company which the Buyer had relied on before it entered into the SPA.
It was later discovered by the Buyer that the Company’s accounts were inaccurate giving rise to a breach of warranty under the SPA. As a consequence, the Buyer brought a claim for breach of warranties pursuant to the SPA. In the (preferred) alternative course of action, the Buyer claimed that the terms of the warranties were representations which had been fabricated by the inaccurate entries. Accordingly, the Buyer also sought damages for misrepresentation under the Misrepresentation Act 1967 and/or at common law.
WARRANTIES OR REPRESENTATIONS ‘ DOES IT MATTER?
Representations and warranties are distinct contractual terms as they give rise to different remedies:
A warranty is an assurance from one party to another that certain facts or conditions are true. It is a contractual term and, if breached, the aggrieved party may have a right to claim damages for breach of contract. The purpose of the award of damages is to put the aggrieved party in the position it would have been in had the warranty been performed.
A representation is a pre-contractual statement of fact or opinion which induces the formation of a contract. If the representation which was relied on by a party to enter into a contract proves to be false, the aggrieved party may have a claim for misrepresentation and the contract may be voidable at the instance of the aggrieved party. As a consequence, the contract may be rescinded and the parties would be restored to their pre-contractual positions.
In the Sycamore case, the maximum award of damages the Buyer could claim for breach of warranty could have been in the region of 6 million pounds. In contrast, a successful claim on the grounds of misrepresentation would potentially entitle the Buyer to far greater damages.
The High Court held that on correct interpretation of the SPA, the express warranties were only warranties and not representations therefore there was no misrepresentation.
In particular, in reaching the decision the court found that:
- In the SPA there was a clear legal distinction between the representations and warranties, and the distinction would have been understood by the draftsman of the SPA.
- The warranties in the SPA were always described as such, and never as representations.
- The wording of the warranty provisions in the SPA related to warranties and not to representations. Given there is a clear legal distinction between the representations and warranties there is no reason to extend the words beyond their natural meaning.
- The limitation of liability provisions in the SPA did not refer to representations.
- Typically, misrepresentations pertain to circumstances where one party makes a representation to another party that induces the other party to enter into a contract. It is therefore problematic to categorise provisions in the SPA as representations that are relied on in entering in the contract as the timing is inconsistent.
This case highlights the fact that the determination of whether a term is a representation or warranty hinges on contractual interpretation. It also reminds us that parties to share purchase agreements need to be aware of the consequence of including or excluding representations as well as warranties. If the parties do agree to exclude representations then prudent drafting, coupled with the inclusion of an entire agreement clause in a share purchase agreement, should be effective in preventing claims for misrepresentation based upon any warranty or other statement contained in the agreement.