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Can a contractual warranty be a representation?

In Sycamore Bidco Ltd v Breslin & another [2012] EWHC 3443 (Ch) the High Court considered whether express warranties in a share sale agreement could found an action for misrepresentation. Disagreeing with a previous decision of Arnold J. (Invertec Ltd v De Mol Holding BV and another [2009] EWHC 2471 (Ch)), Mann J. held that they could not.

The Case

Stuck with limitations on liability for breach of warranties in a share purchase agreement (SPA), the claimants attempted to argue that they were also representations to which no such limitations applied. It is important to note that the claimants were not attempting to rely on any pre-contractual representations, liability for which would have been excluded by the terms of the SPA.

The Decision

The judge gave six reasons for his conclusions (§203):

1. There is a clear distinction in law between representations and warranties, and that would be understood by the draftsman of the SPA. The SPA itself dealt with representations and the express warranties separately;
2. The warranties in this case are clearly, and at all times, described as such, and are nowhere described as representations;
3. The words of the warranting provision are words of warranty not representation. There is a legal distinction between the two and (subject to a point made about a later reference to representations, as to which see below) there is no reason to extend the words beyond their natural meaning. In order to make the relevant material a representation one has to find something in the SPA which is capable of doing that. It is not enough that the subject matter of the warranty is capable of being a representation. One has to find out why those words are there. One finds that in the relevant clause; and what one finds is words of warranty, not words of representation;
4. The Disclosure Letter (itself referred to in the SPA) also distinguishes between representations and warranties – “The disclosure of any matter shall not imply any representation, warranty or undertaking not expressly given in the Agreement …”;
5. One clause of the SPA contains significant limitations on the liability under the “Warranties”. It does not refer to representations. The clause is obviously a significant part of the overall structure of liability. If the warranties were capable of amounting to representations as well, then on the strict wording of this clause it would not apply to any such misrepresentation. The sellers would thus be deprived of a large part of their protection and limitation. That would be a strange and uncommercial state of affairs, and can hardly have been intended. This is strikingly so in relation to the sub-clause  containing the overall cap on recoveries and on what could be recovered from each warrantor, (unless, in relation to the overall cap a misrepresentation claim were construed as a claim under the Agreement, which would be a strained interpretation);
6. There is a conceptual problem in characterising provisions in the contract as being representations relied on in entering into the contract. The timing does not work. The normal case in misrepresentation involves the making of a representation, and as a result the entering into of the contract. That does not work where the only representation is said to be in the contract itself.

The judge found that for these reasons there was “no satisfactory answer” to “the question which has to be asked: Why have the warranty provisions been inserted in the contract? The answer is to be found in clause 5 in each case – they are there because they are warranted. There is nothing more to make them into representations.”

Conclusions

1. Mann J. convincingly identified the conceptual problem inherent in characterising provisions in a contract as representations inducing it.
2. Although couched in the language of contractual construction, Mann J.’s disagreement with Arnold J. is a matter of principle. It will thus be applicable across the board.
3. It is submitted that Mann J. is correct. Without more a contractual warranty is not intended to be nor should it be construed as a representation, let alone a pre-contractual one. As the judge said:

“I do not think it affects the position that in the present case, as in Arnold J’s, the parties (and in particular the warrantors) knew what was coming because drafts have been exchanged and the terms of the contract negotiated. What the warrantors knew to be coming, or more precisely knew they were going to be providing, were expressed to be warranties, not representations.

1.  Parties to commercial agreements of this type (or, at any event, their lawyers)are well aware that liability for pre-contractual representations are generally excluded in favour of warranties in the agreement. If reliance is to be placed on any representations they ought to be specifically set out, as they usually are, in the Disclosure Letter or in the SPA itself.

Related link:  Profile of Richard Perkoff