Share purchase agreements – when is a warranty a representation?

When buying or selling company shares, the share purchase agreement (SPA) will contain extensive warranties and representations about the company which the seller will make to the buyer. A breach of a warranty or representation can have serious consequences so they should be considered carefully.

Contractual promises

A warranty is a promise which is made in a contract by one party to another, while a representation is a statement of fact made by one person to another which induces the other to enter into a contract.

This distinction is important because damages for a breach of warranty and damages for misrepresentation are calculated differently – generally speaking, a claim for misrepresentation will be more favourable to a buyer of shares than a claim for breach of warranty.

Warranties by their nature are also statements of fact, eg “there are no litigation claims in the company”.

Can a breach of warranty also be a misrepresentation?

In the case, Idemitsu Kosan Co. Ltd v Sumitomo Corporation, a buyer of shares discovered that one of the warranties was untrue and tried to claim that the warranty was a representation as they were time-barred from bringing a warranty claim under the SPA.

The court held that a warranty contained in a share purchase agreement does not automatically amount to a representation by its mere insertion in the SPA. In order for a warranty to be a representation, it is important that the representation is communicated before the contract is signed.

What is clear from the decision is that it is likely to be difficult to bring a successful claim that a breach of a warranty in the SPA is also a misrepresentation, if the SPA does not expressly include a provision that the warranties are also to take effect as representations.

Entire agreement clause

A seller of shares should therefore not agree to such a provision and, furthermore, should ensure that the SPA includes a comprehensive ‘entire agreement’ clause so as to exclude any claim for misrepresentation, whether arising from pre-contractual statements or from the warranties.

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