Share Purchase Agreement: Breach of Warranty and Misrepresentation
A recent High Court decision provides some clarification regarding the remedies that will be available for a buyer following a breach of warranty by the seller.
Warranties that are given by the seller in the Share Purchase Agreement (‘SPA’) provide protection for the buyer against the risk of unknown liabilities. They set out assurances from the seller to the buyer as to the condition of the relevant target company, business or asset. If untrue, the buyer can claim contractual damages to the extent that it can prove loss resulting from the breach of warranty. An award of damages for breach of warranty will aim to restore the buyer to the position that it would have enjoyed if the warranty had been true.
One related question that has come before the Court on a number of occasions is the question of whether a contractual warranty can also amount to a ‘representation’. A representation is a statement of fact made by the seller which induces the buyer to enter into the contract. If the representation is untrue, the buyer may set aside the contract and/or claim damages for any resulting loss. An award of damages for misrepresentation will aim to restore the buyer to the position that it would have enjoyed had the misrepresentation never been made.
In practice, during the negotiation of an acquisition, the buyer’s lawyers will often draft the SPA on the basis that the warranties are also representations. This way, if it transpires that any of the matters warranted by the seller are untrue, the buyer will have remedies available both in contract law (for breach of warranty) and in the law of tort (for misrepresentation). The seller’s lawyers will invariably look to resist this and remove any mention of the seller giving representations, as well as adding an express clause excluding the seller’s liability for misrepresentation.
If mention of representations is removed from the SPA, a question which remains is whether it is possible for warranties in an SPA, which are expressed solely to be warranties, to also amount to representations. Previous court decisions have gone both ways, lending some uncertainty and confusion.
In a recent High Court decision (Indemitsu Kosan v Sumitomo Co), the Court has gone some way towards clarifying this point. It held that in the absence of express ‘misrepresentation’ language, the warranties in the SPA will not be actionable also as representations. The buyer’s remedy will lie in contract law, for breach of warranty, and not in an action for misrepresentation.
With this decision in mind, the preferred positions of the parties will continue to be opposed on this point. Sellers will want to ensure that they are giving only warranties and not “warranties and representations”. Sellers will also be well advised to ensure that the SPA includes a clearly worded clause (‘entire agreement’ clause) to expressly exclude liability for misrepresentation. Buyers, on the other hand, will want to ensure that the warranties clause in the SPA confirms the seller “warrants and represents” to the buyer, and also that the ‘entire agreement’ clause expressly states that the buyer is relying on the warranties and representations.