Warranties and Representations in the Context of Purchasing a Business

October 28, 2016

Dispute Resolution

Warranties and Representations in the Context of Purchasing a Business

When acting for either a seller or buyer of a business under a share purchase agreement it is imperative for the lawyer acting to be aware of the distinction between a warranty and a misrepresentation.

A warranty is a term of the contract that a state of affairs exists which if then breached by the seller enables the buyer to bring a claim for breach of contract. The purpose of this is to put the buyer in the position he would have been had the contract not been breached, so it compensates him for what is known as loss of bargain. It is subject to the duty to mitigate losses. In a share purchase agreement it will involve calculating the actual value of the shares and what they are really worth as against what they would have been worth had the warranty been accurate.

A misrepresentation, in contrast, is a false statement usually made at pre contractual stage that induces the other party to enter into the contract. The remedies for misrepresentation are either rescission or damages (for more on this see my earlier article about Constable and Cadillacs). This is potentially a much wider ranging claim to bring as the aim of the exercise is to put the buyer back in the position he would have been in had he not entered into the agreement. This means the Court would need to assess the overall loss sustained by the buyer in entering into the agreement which is likely to be much more substantial than the diminution in value of the shares.

In practice this means properly advised sellers strive to make it clear that a breach of the agreement is a breach of warranty only whereas buyers would prefer to have a remedy under misrepresentation. This often forms the backdrop to much behind the scenes negotiation between the lawyers and clients.

A recent case before the High Court Idemitsu Kosan Co Ltd v Sumitomo Co Corp, heard in the late Summer of 2016, raised a novel point where the buyer claimed in mounting a claim that even though the agreement expressly stipulated the assurances given were warranties, in reality they were misrepresentations. The claim was dismissed mainly because the agreement had what is known as a full entire agreement clause which stated the buyer had not been induced to enter into the agreement on the basis of any misrepresentation.

The lessons from this.

  1. If acting for the seller always ensure that a full entire agreement clause that removes any possible misrepresentation claim is in the agreement for sale.
  2. If you are acting for the buyer try to incorporate the word “represents” into the agreement and keep a careful watch on the time limits for the buyer to claim under the warranties.

An experienced team of lawyers is on hand at this firm to deal with any queries you may have on this matter. Please call us on 01865 244661 to discuss.

posted by Stevyn Jackson | October 28 2016