A crucial reminder of the need for careful drafting in share purchase agreements

February 18, 2013

Warranties and representations can form a key part of share purchase agreements, are generally heavily negotiated between buyers and sellers and often cited together in the contractual terms of a share purchase agreement.  However they constitute two different legal concepts and give rise to different claims and remedies with the difference in potential damages being significant.  A recent case has highlighted the need for careful drafting when excluding representations in share purchase agreements. In Sycamore Bidco Ltd v Breslin and another [2012] EWHC 3443 (Ch), the High Court considered whether express warranties in a share purchase agreement may also form the basis of an action for misrepresentation.

A representation is a statement of fact or opinion usually (but not always) made prior to a contract being entered into.  If a representation is false, the buyer may have the right to rescind the contract and/or a claim for misrepresentation with damages calculated on the basis of restoring the buyer to his pre-contractual position. A warranty is a contractual statement or assurance, if untrue, the buyer may have a claim for breach of contract with damages calculated on the basis of putting the buyer into the position it would have been in had the warranty been correct. In addition the buyer is also bound to mitigate any loss when damages are calculated for breach of contract.

Facts of Sycamore

The buyer, Sycamore, acquired a company from Breslin and another.  After completion the buyer discovered supposed accounting errors in the company’s pre-transaction audited accounts, which were the subject of a number of warranties in the share purchase agreement. Whilst the share purchase agreement contained an entire agreement clause it did not expressly exclude actions for misrepresentations.  

The buyer sued for breach of warranty and asserted (in the alternative) that each warranty which had been breached was also a false representation and had induced it to buy the company.  The High Court found that the warranties did not amount to representations on, amongst other things, the following basis:

  • the warranties were described as warranties in the share purchase agreement and not as representations and the sellers were stated to have “warranted” the warranties and no reference was made to “representing” the same -  it would have been strange if the warranties had amounted to representations, but were deprived of a large part of their limitation; and
  • the limitation of liability clause applied to the warranties only and only referred to warranties. If the warranties had amounted to representations the sellers would have been deprived of a substantial part of their protection under the clause which could not have been the commercial intention of the parties.

The importance of this case is that it confirms that contractual interpretation will determine whether a statement is a representation, a warranty or both and is a reminder of the important difference between both.  If the parties intend warranties to be actionable as representations, then clear wording should be used to that effect.  Similarly, a warrantor wishing to avoid the risk of contractual warranties being construed as representations should ensure there are no references to representations in the agreement and that the entire agreement clause excludes claims for misrepresentation based upon any warranty contained in the agreement.


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