Contractual warranties cannot form the basis of an actionable misrepresentation

In Idemitsu Kosan Co Ltd v Sumitomo Co Corp [2016] EWHC 1909 (Comm), the High Court held that the buyer in a share purchase agreement (SPA) had no claim in misrepresentation against the seller in respect of warranties contained within the SPA as to certain facts about the target company. The Court stated that a contractual warranty does not amount to a representation of fact and is therefore not capable of being the basis of an actionable misrepresentation, although language used in negotiating the draft contract may still amount to a pre-contractual representation.

Facts

The claimant and defendant entered into an agreement for the sale and purchase of shares in a subsidiary. The SPA contained a number of warranties relating to the subsidiary. It was alleged by the buyer, after it discovered substantial liabilities in connection with the target company, that some of the matters warranted by the seller were untrue on the date that the parties entered into the SPA.

A claim for contractual breach of warranty was time-barred by the terms of the SPA, which precluded recovery of any sum in respect of a claim not notified to the defendant within 18 months of completion. The buyer therefore brought a claim for misrepresentation against the seller on the grounds that the warranties amounted to representations and that by providing the SPA for signature, the seller had made actionable pre-contractual representations that satisfied the requirements of an actionable misrepresentation. The seller applied for summary judgment on the basis that the claim had no real prospect of success.

The question for the High Court was whether the statements of fact in the warranties were capable of forming the basis of a misrepresentation or whether they should be treated as nothing more than contractual warranties.

Decision

The claim for misrepresentation was dismissed on the following grounds:

1. The giving by a party of a contractual warranty does not amount to a representation because the act of concluding a contract does not amount to a statement to the other contracting party, rather only an intention to be bound by the terms of the SPA (Sycamore Bidco Ltd v Breslin [2012] EWHC 3443).
2. Although communications and negotiations occurring when the contract is drafted may amount to pre-contractual representations actionable under the Misrepresentation Act 1967 (Eurovideo Bildprogramm GmbH v Pulse Entertainment [2002] EWCA Civ 1235), the provision of an executed copy of the SPA provides no more than evidence of a willingness to give the contractual warranties set out in the contract and does not lead to those warranties becoming representations of fact.
3. The buyer's claim was defeated by an entire agreement and non-reliance clause contained in the SPA, which stated that the buyer had not relied on nor had been induced to enter into the SPA by any representations or warranties other than the contractual warranties.

Comment

The case demonstrates the severe difficulties of pursuing a misrepresentation claim based solely on contractual warranties in a SPA.

For sellers it highlights the important role played by entire agreement and non-reliance clauses.

For buyers, it is a reminder of the importance of due diligence and then, post acquisition, an early assessment of the true state of the acquired company/asset, particularly when the terms of the SPA stipulate a time bar to claims for breach of a contractual warranty.