Decision of High Court concerning whether a warranty was also a representation

Decision of High Court concerning whether a warranty was also a representation

Case

Sycamore Bidco Ltd v Breslin [2012] EWHC 3443

Background

A representation is a statement of fact or opinion and is normally pre-contractual and not a contract term.  A buyer may rely on it and, hence, if the representation is made falsely, the buyer may have a claim for misrepresentation making the contract voidable.  A party who is misled into entering the contract can have it set aside.  The contract can be rescinded restoring the parties to their pre-contract positions.  Damages are usually awarded in successful claims.

A warranty is a contract term and, if not performed, the buyer may be able to claim for breach of contract.  Damages are awarded to successful claimants and are designed to put the claimant, so far as money can do it, into the position it would have been in had the warranty been performed.  A claimant may be able to terminate the contract so that no new obligations arise but not rescind it so the contract is undone, as if it never existed, if a repudiatory breach has occurred.

Facts

This case concerned a share purchase.  The buyer had formed a new company purely for the acquisition.  The buyer paid almost £17million for the company but, following the purchase, was unsatisfied with it following the discovery of what it considered to be accounting errors in the audited accounts (Relevant Accounts), which it had relied upon in agreeing the transaction price.  The buyer maintained that the errors had resulted in the target company’s turnover being overstated in the Relevant Accounts by up to £300,000.

The Relevant Accounts were subject to a number of express warranties within the Share Purchase Agreement (SPA), which included a warranty that:

  • the Relevant Accounts showed a true and fair view of the state of affairs, assets and liabilities and profits or losses of the target company as at the date to which they were prepared; and
  • they had been prepared in accordance with generally accepted accounting practice.

The operative warranty clause in the SPA included the following language:

“The Vendor warrants to the Purchase[r] that, save as fairly disclosed by the Disclosure Letter, the Warranties are true and accurate in all material respects.”

The buyer subsequently sued for breach of warranty and asserted that each breached warranty was also a (false) representation, which had induced it to buy the target company and it therefore sought damages for misrepresentation.

The SPA had contained an entire agreement clause which excluded liability for any representations not set out within it, but did not expressly exclude actions for misrepresentation.

Whilst the main areas of dispute concerned the facts, the Judge also considered whether the express warranties in the SPA were capable of supporting a claim for misrepresentation as an alternative to a contractual claim for breach of warranty.  If the claim had been put successfully by the buyer in misrepresentation, then it may have been able to recover damages equalling or exceeding £16.75million, (putting the buyer back to its pre-contract position), whereas the maximum award for damages for breach of warranty was around £6million.

Decision

It was held that the express warranties were only warranties and not representations as the warranties in this case were always described as such and never as representations.

Breach of Warranty

It was held that there had been various breaches of warranty, including a breach of the warranty relating to the accuracy and preparation of the Relevant Accounts.  The Judge found that there had been departures from accepted accountancy standards in their preparation; that those departures resulted in the turnover of the target company being inappropriately inflated, which consequently failed to give the Relevant Accounts a true and fair view of the state of affairs of the target company; and that a failure to give a true and fair view was material in the circumstances.

Damages for Breach of Warranty

The value of the damages claim for breach of warranty initially emerged at £4.75million, though this might be increased because of a tax grossing up provision in the SPA to a sum in excess of £6million.

Comment

This case highlights that clear wording should be included within an agreement if the parties intend express warranties to also be actionable as representations.  In the alternative, should a warrantor wish to avoid the risk of contractual warranties being construed as representations then they should ensure that all language of representation is excluded within the agreement.