It is common in share purchase agreements for the warranty
clause (the first draft of which is prepared by the Buyer's solicitors) to use
wording such as "The Sellers warrant, represent and undertake that…" Whilst this may just be a case of lawyers
preferring to use three words when one will do, there is often more to the use
of such language than meets the eye.
A warranty is a contractual promise that something is so;
e.g. that the Company does not have any liability in respect of a particular
matter. If that turns out not to have
been so, the Buyer has a claim for breach of contract. Such claims are subject to
carefully-negotiated limitations of the Buyer’s liability under the share
purchase agreement; typically a cap of the amount of purchase price received, a
minimum threshold for claims, and a time limit for bringing claims of 1 to 3
years (or 6 or 7 years where tax is involved).
A representation is a statement of fact that induces a party
to enter into a contract. If it turns
out to have been untrue, the other party may claim damages for misrepresentation. This is a claim in tort (a legal wrong), not
a claim for breach of contract, and the damages are calculated differently. The limitations of liability in the share
purchase agreement are not usually drafted to cover liability for
misrepresentation. This is why buyers’
solicitors try to include the language of representation, and sellers’
solicitors seek to delete it. Such
deletions are usually accepted without serious argument - though private equity
investors' solicitors may take a tougher line, and be in a stronger negotiating
position.
An undertaking is a contractual promise to do something (or
not to do it). This is completely
inappropriate language for the warranties in a share purchase agreement, and is
either bad drafting or a cunning attempt to hide the word "represent”
amongst some apparent bad drafting.
Acting for the Seller, one therefore always seeks to avoid
the language of representation, and to include the usual boilerplate "entire
agreement" clause to the effect that this is the entire agreement between
the parties, it supersedes all prior negotiations, and the Buyer acknowledges
it is not relying on any previous representations. This language is intended to exclude
liability for misrepresentation, and with an express exception for liability
for fraudulent misrepresentation is generally considered to be reasonable if
negotiated at arms’ length between commercial parties with the benefit of legal
advice (This is important because under the Misrepresentation Act 1967
liability for misrepresentation can only legally be excluded to the extent the
exclusion is reasonable.)
In the case of Idemitsu Kosan
Co Ltd v Sumitomo Corporation [2016] EWHC 1909 (Comm) (27 July 2016),
Idemitsu were out of time for bringing a contractual claim for breach of
warranty under a share purchase agreement (the agreed 18 month time limit for non-tax
warranty claims having expired without a claim having been made), so they
sought to get round this by bringing a claim for misrepresentation under s.2(1)
of the Misrepresentation Act 1967. Sumitomo
responded with an application under CPR Part 24 for summary judgment dismissing
that claim, on the basis that it had no real prospect of success and there was
no other compelling reason why it should be disposed of at a trial.
Such cases always depend on the wording of the agreement,
and Idemitsu were in some difficulty there, as the relevant clauses only used
the language of warranties. The word
"representation" only appeared in the entire agreement clause,
apparently intended to exclude them.
However there were conflicting previous cases on the point: in one
Arnold J. had decided that warranties could of themselves amount to
representations, and in another Mann J. had decided that they could not. Both are eminent judges. Idemitsu’s Counsel also ran a clever argument
that by putting forward the agreement with the warranties for execution, Sumitomo
had made representations inducing Idemitsu to enter into the agreement. The target Company had interests in North Sea
oil and gas fields, had been sold for US$575M, and Idemitsu was seeking to recover
a claimed loss of US$105.9M (as against a contractual cap on warranty claims of
US$1,5M) relating to liability for sharing the operating expenses of a floating
production storage and offshore loading vessel.
So it must have seemed worth a try.
Andrew Baker QC sitting as a judge of the High Court was
unconvinced by Idemitsu’s Counsel’s arguments, and preferred the reasoning of
Mann J. from the previous cases. He held
that a warranty is (without further language) a contractual promise: nothing
less, but nothing more. He upheld the
entire agreement clause as effective to exclude misrepresentations, of which
there were none. He therefore gave
judgment for the defendant.
The case is welcome confirmation that my deletions of
representation wording when acting for sellers were not in vain, and should be of
comfort to sellers that their limitations on liability do mean what they
thought they did. However, given the
amount at stake and the conflicting first-instance decisions, it may still go
to the Court of Appeal.
