Can a warranty in a share purchase agreement (SPA) also be a representation?

A recent case has examined this particular point – Sycamore Bidco Ltd v Breslin (2012) – and has provided a useful insight as to the courts approach when faced with such issues.

Representations and warranties can quite often be confused, not least because standard drafting of a number of contracts will refer to both in the same clauses. However, it is not always the case that a representation is also a warranty. It is an important distinction to make however, as the remedies available under each vary quite considerably.

To briefly explain the difference between the two:

A Warranty is an express contractual term which, if breached, can result in an action for damages. The principle for damages is that the injured party should be put into the position it should have been, had the contract been correctly performed.

A Representation however is a statement of fact or opinion given by one party to another, ordinarily before a formal contract is entered into or concluded, and is therefore not usually a contractual term. If the representation turns out to be incorrect, the buyer may be able to claim misrepresentation and have the contract rescinded (or declared ‘void’) – which would allow a contract to be undone and an award of damages.

The brief facts of the Sycamore case are that after acquisition, the Buyers of a company believed they uncovered errors in the target company’s accounts, which they claimed had been relied upon before entering into the contract. The value the Buyer placed on the discrepancy was that the turnover was over-estimated by some £300,000.00.

The SPA contained relatively standard warranties, which stated that the accounts “showed a true and fair view of the state of affairs... and profits... as at the date they were prepared...” and that they had been prepared in accordance with generally accepted accounting practice (GAAP).

The Buyer therefore sued for breach of warranty (an action worth in the region of £6m) but also stated that the breach of the warranties mentioned above was a misrepresentation which had induced it to complete the acquisition (which could give rise to recission of the contract, potentially worth the entire £17m consideration paid).

The High Court reached the decision that no representations had in fact been made, so there could not therefore be any misrepresentation. In the Courts opinion the relevant statements in the SPA were always described as ‘Warranties’ and not as representations, but moreover, the suggestion that a representation could be included in a contract did not work – misrepresentation should involve the making of a representation before the date of the Contract and not within it. The claim for breach of warranty was however upheld as the accounts had actually been inflated, so did not give a true and fair view of the state of affairs, and they had departed from GAAP.
The loss arising from breach of warranty was – on the basis of damages – therefore assessed to be the difference between the price paid on completion, and its actual value. Owing to the inflation of the turnover, the actual value was assessed at £12m, and accordingly the value of the breach of warranty was in the region of £5m. Had the claim for misrepresentation been successful though, the value of the claim would have been considerably higher.

The case is a useful reminder that if the buyer and seller are to include representations into a contract, there must be clear wording to that effect. Although it is unlikely to ever be accepted by a prudent Seller, if it is factually the case then the Buyer should seek to include a provision whereby the Seller acknowledges it has made representations which have induced the recipient to enter into the Agreement.

From the Sellers perspective, they should ensure that any references to representation are removed from the SPA, as well as including a detailed entire agreement clause, which seeks to exclude any innocent or negligent misrepresentation based upon any warranties contained in the Agreement.

For further information or advice about Warranties and Representations call Mark Alexander on 0800 310 2000.