The decision of the High Court in last month’s case of Idemitsu Kosan Co Ltd v Sumitomo Co Corp (Idemitsu) has given some clarity to whether warranties can also be considered representations. The recent decision in Idemitsu confirms the approach taken in the case of Sycamore Bidco Ltd v Breslin & Anor (Sycamore) that contractual warranties do not amount to representations, after uncertainty remained from the ruling delivered in the Invertec Ltd v De Mol Holding BV (Invertec) case.

In the context of a share or asset sale, a sale and purchase agreement (SPA) is very often entered into, which records the terms upon which each party is willing to buy or sell (as the case may be) the shares or business and assets. A series of warranties are (or even a separate warranty schedule is) included within the SPA, and these are very often described by professional advisers as a series of contractual promises or statements of fact upon which a potential buyer is willing to purchase the shares or business and assets from the seller. Such warranties are often included after due diligence has been concluded and are tailored to the specific transaction. Once negotiation has taken place between the parties (often including the legal advisers) regarding the scope of the warranties and a disclosure process (providing details of the circumstances where certain warranties are untrue) has been completed, the parties execute the SPA and money (or other forms of consideration) changes hands. The warranties are included for the benefit of the buyer, and in accordance with the other terms of the SPA, give the buyer a potential recourse should any of the warranties turn out to be untrue, resulting in the buyer suffering a loss.

Whilst each case turned on its facts, Sycamore, Invertec and Idemitsu all raised the question of (i) whether the warranties were contractual terms, where if a breach was experienced, the contract would remain to be performed with the appropriate remedy being damages, or (ii) whether the warranties were representations (a statement of fact or opinion), not a contract term and if found to be false, the buyer relied upon it and was induced by such statement of fact, the appropriate remedy would be a claim for misrepresentation rendering the contract voidable. For a buyer, treating the warranties as representations would be more beneficial as it would enable the contract to be rescinded, which has a resulting effect of putting the buyer in a pre-contract position – usually, in practice, resulting in higher damages being awarded. For a seller the contrary, they would prefer the warranties to be seen as contractual promises with the remedy of damages putting the buyer in the position should the particular warranty have been true, but in all other respect the contract continues. The seller, if advised correctly, is also able to negotiate a number of limitations on warranty claims which have to be adhered to before a breach of contract claim can be brought.

The Idemitsu decision has clarified that, in the absence of statements being described in all respects as representations, the court is likely to construe warranties contained within an SPA as just that – warranties not representations. The buyer in the Idemitsu case had argued that the statements of fact contained in the SPA were capable of founding an action for misrepresentation – that the act of providing an executed SPA to the buyer meant that those statements of fact were made prior to the conclusion of the SPA and had induced the buyer to sign the SPA in reliance on those facts. The court did not accept this and detailed on the facts that the seller’s provision of the SPA for execution communicated nothing more than a willingness to give a certain set of contractual warranties in a concluded contract.

Whilst it will always be very case specific, the Idemitsu decision gives an indication of how the courts are likely to interpret warranties, and a seller should note the following outcomes from the case to ensure warranties are not considered representations:

  1. warranties should be consistently described as solely warranties, i.e. the definition should not be ‘the warranties and representations contained in clause X and schedule Y’. This restricted definition should be followed through in all the ancillary documents to the transaction.
  2. an entire agreement clause in the SPA should be drafted to confirm that the buyer has not relied upon any representations (other than the warranties) in entering into the SPA, and may want to exclude recession of the contract for a breach of the warranties.
  3. ensure that warranties are contained in the main body of the SPA, i.e. not provided in a separate document which may be considered a set of pre-contractual statements of fact.

If you are thinking of buying or selling shares or business and assets then please contact a member of our experienced Corporate department today.