Case law: Court clarifies when warranties are not also representations on sale of shares
Sellers of shares in a company should ensure their share sale agreement does not say or imply that warranties they give are also representations, and that it contains a robust 'entire agreement' clause, otherwise they risk being liable for misrepresentation as well as breach of warranty if the warranties are false, a ruling makes clear.
This update was published in Legal Alert - October 2016
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A buyer of a company's shares argued that warranties in the share sale agreement it had signed were also representations – even though the agreement did not expressly say they were - and it could bring a claim for breach of warranty and/or misrepresentation when he later discovered the warranties were false. A warranty is a contractual promise, not information or a statement made to a buyer.
This was important because the time limit for bringing a claim for breach of warranty had expired; and the remedies available for misrepresentation were different to those for breach of warranty.
However, the agreement also contained an 'entire agreement' clause under which the buyer had agreed that it had not 'relied on, or been induced to enter into' the contract by anything other than the warranties.
The High Court ruled that the warranties were not also representations. It found that:
- Merely concluding an agreement that contains warranties does not mean a seller is agreeing that the warranties could be grounds for a claim of misrepresentation
- Provided the wording of an agreement does not say or imply that the warranties are also representations. The court will not extend the word 'warranty' beyond its natural and ordinary meaning
- The entire agreement clause in this case was 'robust', and effectively excluded any possibility that the warranty could be interpreted as a representation
The court therefore ruled that the warranties did not amount to misrepresentations.
- Sellers of shares in a company should ensure that the share sale agreement does not say or imply that warranties given by the seller are also representations, and that it contains a robust 'entire agreement' clause - or risk being liable for misrepresentation as well as breach of warranty if the warranties are false
Case ref: Idemitsu Kosan Co Ltd v Sumitomo Co Corp  EWHC 1909
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.