Mind the draft – can a warranty also be a representation?

12 September 2016

A recent decision by the High Court in Idemitsu v Sumitomo [2016] EWHC 1909 (Comm) has clarified the position on whether warranties can also be representations. This was in the context of a misrepresentation claim arising out of a Share Purchase Agreement (“SPA”).

Sumitomo had sold its shares in its subsidiary, which owned interests in North Sea oil fields, to Idemitsu. As part of the SPA, Sumitomo gave a number of warranties to Idemitsu, one of which related to the fact that there were no liabilities in relation to any potential or actual litigation. It was only later that Idemitsu discovered that there were indeed substantial liabilities relating to a dispute over the operating expenses of a shared vessel. However, by the terms of the SPA, it had agreed with Sumitomo that it would be barred from bringing any claim for breach of warranty if such claims were not notified within 18 months of completion (they were not).

As such, Idemitsu sought to establish that the warranties were also representations and brought an action to recover damages under the Misrepresentation Act 1967. It argued both that the concluded SPA contained actionable misrepresentations and that the ‘Execution Copy’ of the SPA as presented by Sumitomo amounted to pre-contractual misrepresentations.

Sumitomo countered by applying for summary judgment of the claim and was successful in that application. The High Court, in dismissing Idemitsu’s two central arguments, held that:

  • there is a clear distinction between warranties and representations at law. The former is a contractual promise which becomes effective on completion and the latter is a pre-contractual statement. The parties, being sophisticated commercial parties with separate legal representation, were aware of this. The bargain that Idemitsu struck was such that it limited itself to breach of warranty claims, and these in turn were limited by the 18 month cut-off;
  • the mere presentation of an ‘Execution Copy’ of a document, containing warranties, cannot amount to a misrepresentation – it simply illustrates the willingness of one party to give a set of contractual promises to the other. Although in principle it may be possible for previous drafts of contracts to be pre-contractual representations, in this case that would have required the court to artificially rend the schedule of warranties from the rest of the SPA and consider them in isolation; and
  • in any event, the SPA’s entire agreement clause would have been sufficient to exclude pre-contractual representations and defeat Idemitsu’s claim.

This case also illustrates the importance of properly drafting entire agreement clauses and fully considering the implications of the manner in which warranties are drafted. It may be prudent for a buyer under an SPA to ensure that a seller both “warrants and represents” a certain set of facts in order to avoid this issue and to attempt to engage parallel remedies in both contract and tort. This is no less important for a buyer involved in an asset purchase, where it is crucial to have proper protection with regard to potential liabilities associated with the TUPE Regulations.

The judgment has implications in other employment law contexts as well, of course, and will be worth bearing in mind for employers when drafting their settlement agreements, especially where large pay outs are concerned, such as in the financial services sector or for senior executives.

Further information

If you have any questions about the issues raised in this blog, please contact a member of our employment team.

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