In Sycamore Bidco Ltd v Breslin, the High Court considered whether express warranties in a share sale agreement could also found an action for misrepresentation.
Following completion of a share acquisition, the buyer discovered what it considered to be accounting errors in the pre-transaction audited accounts on which it had relied when agreeing the price for the target company.
The share purchase agreement contained warranties relating to those accounts.
The buyer sued for breach of warranties and sought damages for misrepresentation on the basis that those warranties were also false representations which had induced it to buy the target company.
Warranty versus representation
Perhaps the most important distinction between warranties and representations is the basis on which damages are measured.
A warranty is a contractual statement or assurance given that a certain state of affairs exists. If the warranty is not true, the buyer may have a claim for breach of contract, the remedy for which is damages calculated on the basis of putting the claimant into the position it would have occupied if the warranty had been performed.
A representation is a statement of fact or opinion usually (but not always) made before the contract is entered into. For misrepresentation, which requires the claimant to show that it has relied on the representation and was induced by it to enter into the contract, the potential award for damages may be higher, as it will be calculated in the basis of restoring the parties to their pre-contract positions.
In Sycamore, the difference between the lower, breach of contract damages, and the higher, misrepresentation damages, was estimated to be more than £10m.
The judge held that the express warranties were not capable of supporting a claim for misrepresentation on the basis that:
- the clear distinction between warranties and representations would have been understood by the draftsman of the agreement and this was apparent in the agreement
- the warranties were never described as representations
- the operative warranty provision did not include words of representation. In order to make the relevant material a representation there would need to be something to that effect in the agreement. It is not enough that the subject matter of the warranty is capable of being a representation
- the disclosure letter in the agreement distinguished between warranties and representations by listing them separately
- the warranty limitation provisions did not refer to representations and it would have been a strange and uncommercial state of affairs if the warranties had amounted to representations, but were deprived of a large part of their limitation
- as the representation would have been only given in the contract itself, it did not sit with the usual case of misrepresentation, namely the making of the representation and, as a result, the entering into of the contract. The timing therefore did not work.
The case is an important reminder of the distinction between warranties and representations.
The question of whether a statement is a warranty, a representation or both, will depend on the wording used and the context of the contract in question. This case clearly demonstrates the need for careful drafting.
Case: Sycamore Bidco Ltd v Breslin  EWHC 3443 (Ch)