'Reps' and Warranties: One Could Cost More Than the Other Under English Contract Law

by Pillsbury Winthrop Shaw Pittman LLP
Contact

Contractual representations and warranties are often grouped together, referred to in shorthand as “reps and warranties.” The differences between the two concepts are often forgotten, but the distinction is important: a representation is a statement of fact made by one party to another party that, if untrue, may create grounds for a claim under tort for misrepresentation; a warranty is a contractual promise that, if untrue, may create a cause of action for breach of contract. The measurement of damages for each cause of action is different, and a failure to appreciate the distinctions when entering into a contract governed by English law could be quite expensive, as recently illustrated by the English High Court decision in Sycamore Bidco Ltd v Breslin & Anor., [2012] EWHC 3443 (Ch).

According to the findings of Mr. Justice Mann, the claimant Sycamore was formed for the special purpose of acquiring from the defendants all the shares in a private limited company known as Gissings Group Ltd, the principal asset of which was an operating subsidiary known as Gissings Advisory Services Ltd., for an amount in excess of £16 million. The share purchase agreement (SPA) contained an express warranty that the acquired company's accounts gave a true and fair view of the company’s finances and had been prepared in accordance with generally accepted accounting principles.

Sycamore subsequently determined that certain amounts had been improperly included in the company’s accounts as turnover and that this rendered the accounts inaccurate. It began court proceedings against defendants alleging, amongst other things, a breach of their accounting warranty. Sycamore further claimed in its legal action that each express warranty in the SPA was also a representation that had induced it to purchase the company shares, and therefore each also amounted to an actionable misrepresentation under both common law and the Misrepresentation Act 1967.

Mr. Justice Mann, after consideration, held that there had indeed been a breach of the express warranty but dismissed Sycamore’s claim for misrepresentation. The SPA provided that "Each party acknowledges that it has not relied on or been induced to enter into this agreement by a representation other than those expressly set out in the Transaction Documents.” Another factor in this decision was that the SPA’s limitation of liability clause referred only to warranties. In Mr. Justice Mann’s view, it could not have been the reasonable intention of the parties to apply a strict limitation to any claim for breach of a warranty but then to turn around and provide for unlimited liability if a warranty was also considered a representation. He found that the contract language of the SPA clearly distinguished between representations and warranties and there was no reason to conflate or extend those terms beyond their natural meanings.

The distinction between warranty and representation came to have very real consequences for Sycamore because of the difference in the measure of damages for the claim for breach of warranty compared with that for misrepresentation, which under English law are different in the following ways:

  • damages for breach of a contractual warranty are to be calculated so as to put the claimant in the position it would have been in but for the breach, that is, as if the warranty had in fact been true rather than untrue –the books and records fair and accurate rather than improperly inflated; whereas
  • damages for a tortious misrepresentation that induced the contract are calculated to put the parties back to their pre-contract positions.

Sycamore argued under its rejected claim for misrepresentation that, if it had been aware of the target company’s true financial position, then it simply would not have bought the company and demanded repayment of the entire £16 million it had paid. In awarding Sycamore only damages for breach of warranty, Mr. Justice Mann based his calculation on the difference between the amount Sycamore paid for the company and what the company was actually worth, or what he found Sycamore would have paid had the warranty of financial condition been true. That came to around £4.75 million.

The value of these terms and the distinction between representations and warranties thus came to about £11 million. This case serves as a reminder that it is well worth the time to carefully consider the full implications of the contract wording, and to remember the critical importance between the consequences of making and receiving a representation and a warranty.

Written by:

Pillsbury Winthrop Shaw Pittman LLP
Contact
more
less

Pillsbury Winthrop Shaw Pittman LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!