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In Idemitsu Kosan Co Ltd v Sumitomo Co Corp  EWHC 1909 (Comm), the High Court considered that express warranties in a share purchase agreement (SPA) were not capable of founding an action for misrepresentation. This case serves as a reminder of the consequences of a warranty also amounting to a representation and highlights the significance of an entire agreement clause in this context.
Following the decision in the Sycamore Bidco case back in 2012, there was some uncertainty as to whether it is possible for warranties in an SPA, which are expressed solely to be warranties, to also amount to representations that are capable of founding an action for misrepresentation. This was due to conflicting positions taken by the respective judges in Sycamore Bidco and Invertec which were based on similar facts.
We often see express drafting along the lines of "the seller warrants and represents that […]". Although this drafting is not necessarily conclusive that the warranties do indeed also amount to representations, as this will also be based on the facts of a given case, what is the significance if they do?
A warranty amounts to a contractual promise, or rather a term of the agreement between the parties. Breach of a contractual term will give rise to a claim for breach of contract, the remedy for which is damages. The measure of damages in this context is that the damages should (so far as a monetary award can do it) place the buyer in the same position as if the contract had been performed in accordance with its terms. The limitation of remoteness will apply, which is in essence a test of foreseeability of any loss suffered, as set out in Hadley v Baxendale. If the breach is repudiatory, it may also give the buyer the right to terminate the contract.
A representation is normally a pre-contractual statement of fact or opinion (although a representation may also be repeated in the contract), which if false and relied on by the buyer, may entitle the buyer to a claim for misrepresentation under the Misrepresentation Act 1967. Generally the remedy for negligent or innocent misrepresentation is damages and/or rescission of the contract - that is, it will be undone and the parties restored to their pre-contract positions. In practice damages are often awarded in lieu of rescission, assessed to achieve the same result in money terms. The measure of damages will be to put the buyer back in the position he would have been in if the contract were to be unwound (with no remoteness limit).
It will be a question of fact as to whether it will be a more advantageous measure of damages to seek to replicate unwinding the contract (the tortious measure under the Misrepresentation Act 1967), or put the buyer in the same position he would have been in if the contract had been performed in accordance with its terms (a cause of action in contract).
In Idemitsu Kosan v Sumitomo, the buyer asserted that, despite the fact that the warranties were not expressly stated to be representations, the warranties in the agreement were indeed actionable as misrepresentations. However, helpfully the court held that the entire agreement clause excluded recourse to any arguments that any actionable representations had been made, however and whenever allegedly made.
When acting for a buyer it will often be advantageous to draft on the basis that the warranties given by the seller are also representations, in an attempt to give the buyer parallel remedies in both contract and the tort of misrepresentation.
The Idemitsu Kosan v Sumitomo case highlights the benefit of including a full entire agreement clause when acting for the seller. This should acknowledge that neither party has been induced to enter into the agreement by, nor has it relied upon, any representation, assurance or undertaking (whether in writing or not) save for those contained in the agreement, and that the only remedy available to it in respect of the subject matter of the agreement shall be for breach of contract. Any representation language should also be removed from the agreement.
This article was written by Christina Fleming. For more information, please contact Christina on +44 (0)20 7427 1022 or email@example.com