Warranty or Representation

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Posted in:Corporate and Commercial, HR and Employment|April 29, 2013 | Join the mailing list

In the recent case of Sycamore Bidco Limited v Sean Breslin and Andrew Dawson [2012] EWHC 3443 Ch, the High Court analysed the differences between warranties and representations.

The case involved the sale and purchase agreement of a management buy-out.  The management buy-out team had acquired an insurance broking firm through auction.  Based on accounts provided to the team, the freshly incorporated company (purchaser)
had valued the target company in the region of £16.75 million.

Following completion of the transaction it was discovered that several accounting errors had inflated the turnover figure by roughly £300,000.  It was also found that the finance director and other management members knew of the errors in
the calculation of compensation payments; however, there was no finding of dishonesty relating to their statement that the payments were part of the turnover figure.

The purchaser claimed there was a breach of the accounts warranties and that those breached warranties were misrepresentations.
 
The High Court concluded that whilst there had been a breach of warranty there was no claim for misrepresentation.

The Court stated that there was only a finding of breach of warranty and not a misrepresentation because the share purchase agreement had clearly defined the warranties as warranties and not representations.  Further the disclosure letter
made a distinction between warranties and representations.

Further, the share purchase agreement contained limitations on liability in respect of warranties but nothing in relation to misrepresentation.  It was therefore commented by the Judge that if the warranties were also representations then
this would not make commercial sense as the seller would have no protection.

Finally the judge noted that a misrepresentation generally induces a party to enter into a contract, in the case the claim is that the contract itself is the misrepresentation, therefore the timing does not work as it cannot be said that
the contract was used to induce the purchaser into the agreement.

The significant difference between a finding of warranty or representation comes in respect of damages.  Damages for a breach of warranty are intended to put the wronged party in the position it would have been in had the warranty been true. 
Damages for misrepresentation are intended to put the wronged party in the position it would have been in if the misrepresentation had not been made.

In the present case this means based on a warranty, damages would relate to the adjusted price based on accurate turnover figures (the difference between what the price should have been and what the purchaser paid); whereas if there was a
misrepresentation then the purchaser could claim they would have never entered into the agreement and therefore damages would relate to the full purchase figure.

Based on this case it is apparent that clear and unambiguous language is required to prevent warranties being used in a claim for misrepresentation.  Where warranties are to be used as representations the appropriate protections should be
drafted into the contract otherwise a warranty may be found to be a representation.  As case law has demonstrated this area of law remains fact based and there is no clear precedent that warranties either can or cannot be classed as a representation.  Accordingly,
when drafting the need for precise language and appropriate limits on liability are fundamental.

Should you have any concerns regarding transactions you are in the process of, or seek guidance and advice in relation to proposed transactions please contact Stephen Foster, Head of Corporate at
stephenf@berg.co.uk or by telephoning 0161 833 9211.

The information and opinions contained in this article are not intended to be comprehensive or to provide legal advice.  No responsibility for article’s accuracy or correctness is assumed by Berg or any of its partners or employees.  Professional
legal advice should be obtained before taking, or refraining from taking, any action as a result of the contents of this article.

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