Warranties and/or representations, and why it matters

24th November 2016

A common pitfall in commercial negotiations can be the incorrect or inadvertent use of terminology which has specific legal meaning and consequence. A good example of this is where one party (for example, a seller) “warrants” or “warrants and represents” something to another (say, a buyer or target) in a contract.  There is an important distinction between warranties and representations in English law and whether you want to give either or both of these to your counterparty will depend on your bargaining position and will differ from case to case.

The High Court has recently highlighted this distinction in its analysis of the terms of a sale and purchase agreement (SPA) entered into in the context of an oil and gas exploration project.  The case of Idemnitsu Kosan Co Ltd v Sumitomo Co Corp [1] therefore provides welcome clarity for all commercial contracting parties.

Warranties and/or representations – what the terms mean and why it matters

A warranty is a contractual promise which, if it is not true or properly performed, gives rise to a claim for breach of contract. The innocent party’s remedy for breach of contract is damages which, so far as money can do, will put that party into the position it would have been if the promise had been performed [2].  A claim for breach of a warranty will be subject to certain limitations, for example the applicable contractual or statutory time-bar on the bringing of claims; any notification requirements or other pre-requisites to initiating a claim; and/or any contractual exclusion/limitation clauses.

By contrast, a representation is a pre-contractual statement of fact or opinion made by one party which induces the other to enter a contract. If the representation is untrue it gives rise to the right for the innocent party to set aside the contract [3] as if it had never been made, or for the innocent party to receive monetary compensation to achieve the same result.  Whilst it may be possible for parties to place express limitations on the bringing of misrepresentation claims, it will often be in the innocent party’s best interests to pursue a misrepresentation claim as an alternative or an additional option.

Until the recent Idemnitsu Kosan v Sumitomo case, there was conflicting authority on whether and when warranties might also be actionable as representations.

High Court case

The buyer argued that warranties given in the SPA were also representations capable of founding a claim for misrepresentation. (The argument was important in this case because a contractual provision precluded the bringing of a breach of warranty claim unless the claim was notified to the seller within eighteen months of completion, and the buyer had not notified its claim within that time.)  The buyer asserted that expressly referring to those statements within the SPA as warranties did not derogate from their inherent quality as representations [4].

Summarily dismissing the buyer’s claim, the court noted:

• It is not enough that a warranty is capable of being a representation. What matters is the parties’ intention at the time the contract is completed.
• Here, the relevant contractual provisions were expressly referred to only as warranties.
• This was a commercial transaction conducted at arm’s length by sophisticated parties who were advised by experienced solicitors and accountants. The parties would have been aware of the important distinction between warranties and representations.
• In the absence of clear drafting that specifically imports representations, it would be artificial and wrong for a court to interpret a warranty also as a representation.

‘Entire agreement’ clause – a final nail

In any event, in this particular contract, there was an ‘entire agreement’ clause under which the buyer had agreed that it had not relied on or been induced to enter the SPA by any representations or warranties other than the express and defined contractual warranties. Even if the buyer’s primary arguments had succeeded, the entire agreement clause would have defeated the claim.

WM Comment

There are some key practical points for contracting parties to take away from this case:

• In the contractual context, terminology matters. Whether you give or accept warranties and/or representations can make a huge difference to your claim and compensation options in the event of any breach down the line.
• Whether warranties and/or representations will be appropriate will differ according to your position in any commercial negotiations; what you ultimately hope to achieve from the contract; and any case-specific facts.
• Make sure that you don’t negotiate and complete any contract without fully understanding the options available to you.
• Once you do understand your options, make sure that the contract is drafted clearly and accurately to reflect the parties’ intentions.
• Immediately you become aware of any breach, check the time limit and any express notification or other procedural requirements for issuing a claim – and make sure that you comply fully.
• Is there is an entire agreement clause in the contract? If so, depending on the drafting, that may prove fatal to a claim.
• In terms of tactics, it is worth noting that this case was resolved by summary judgment. The bar for summary judgment is high, but in those cases where it is possible to show that the opponent has no real prospect of successfully succeeding on or defending the claim and there is no other compelling reason why the matter should be disposed of at a full trial, there is the potential to achieve significant time and cost savings.

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[1] [2016] EWHC 1909 (Comm)
[2] In some circumstances, if a breach is ‘repudiatory’ and goes right to the root of a contract, the innocent party may also have a right to terminate the contract, so that no new future obligations arise.  Even then, however, the contract will not be undone as if it had never been completed.
[3] that is, to rescind the contract
[4] ibid para. 15