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To Warrant is not to Represent

12th December 2016

Two large Japanese energy corporations slugged out a US $575 million claim earlier in the year and in so doing helped to resolve conflicting High Court authorities as to whether a contract term expressly stated to be a warranty can also amount to a representation.

In 2009 the High Court held that a contract term expressly stated to be a warranty should also be treated as a representation allowing the Buyer to claim for misrepresentation under section 2(1) of the Misrepresentation Act 1967. This is important. If there has been a misrepresentation the party to whom the representation was made can rescind the contract.

Rescission means the parties will, as far as possible, be placed back into the position they would have been in if they had never entered into the contract. In its simplest form in a company share purchase, this would mean the Buyer returning the shares to the Seller and the Seller repaying the purchase price to the Buyer.

In 2013 the High Court broke from the earlier decision and held that where the term was clearly expressed as a warranty, and only as a warranty, it could not also be treated as a representation in the absence of any other express language in the agreement.

In the present case Indemitsu Kosan acquired the entire issued share capital of Petro Summit Investment UK Limited (the “Target”) from the Sumitomo Corporation in November 2009. Indemitsu paid some US $575 million for the Target which held valuable interests in two adjacent North Sea oil and gas fields. The underlying substance of the claim was that the Target was subject to substantial liabilities arising from a dispute between the respective owners of the two oil and gas fields about the sharing of the operating expenses of a floating storage and loading vessel. Indemitsu claimed its recoverable loss was US $105.9 million.

In the Share Purchase Agreement (SPA) to buy the Target, Sumitomo gave various warranties about the Target which Indemitsu claimed were breached by the existence of the dispute. However, a claim under the warranties was time barred – the warranty claim period being 18 months and no such claim had been brought within the required time period. In the alternative Indemitsu claimed (i) the warranties were also representations and (ii) that when Sumitomo presented the execution copy of the SPA which it had already signed, Sumitomo made representations in the manner of the warranties. Sumitomo applied for summary judgment to dismiss Indemitsu’s claim on the grounds it had no real prospect of success and there was no other compelling reason why the matter should go to trial.

The court dismissed both limbs of Indemitsu’s misrepresentation claim. Where a contract term expressly states that a party is only giving a warranty, those warranties will not also be considered to be representations. Nor does the party, by merely concluding the contract make any statement that would constitute an actionable representation. By providing the execution copy of the SPA Sumitomo communicated nothing more than it was prepared to give various contractual warranties when concluding the contract. The second limb of Indemitsu’s claim was further defeated by the entire agreement clause contained in the SPA, pursuant to which Indemitsu had agreed and acknowledged that it had not relied on or been induced to enter into the SPA by any representations or warranties other than those expressly set out in the SPA.

The lessons to draw from this decision are two-fold:

  • Any party giving warranty statements should not also give these warranties as representations, or at least not without careful consideration and understanding of the implications of giving representations and the potential for misrepresentation claims. So if the sale contract states “the Seller represents and warrants …” and you are the Seller, consider amending the provision to read “the Seller warrants …”.
  • Make sure you include in your contracts (in particular where you are the Seller or supplier) a properly drafted entire agreement clause to exclude liability for misrepresentations (pre-contract statements).

Whilst the present case considered warranties given in relation to a company sale the same principles will apply to warranties (and representations) given in other contracts – such as supply contracts, IP licences, IT contracts and other sale agreements. Therefore care should be taken whenever a contract calls for matters to be represented as well as warranted.

For further information please contact Neale Andrews, Head of Corporate and Commercial.

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