We continue to provide our legal services through the COVID-19 pandemic. Please visit our COVID-19 Hub for legal insights, or contact us directly.
Get in Touch Menu

Share purchase agreements – when is a warranty a representation?

06 December 2016

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.

We're here to help

Related services
Share this article
Resources to help

Related articles

US $1.7 billion deal hangs in the balance as court examines validity of clause


A recent High Court decision has shone the spotlight on material adverse change (MAC) clauses and their effectiveness. What is a material adverse change clause? You will most likely come…

Helen Howes LLM

The rise of the management buyout


Despite the chief economist of the Bank of England’s reassurances that the post-COVID economy is “poised like a coiled spring”, current market conditions are undoubtedly making traditional mergers and acquisitions…

Chris Wills LLB (Hons)

Legal perspectives on the Budget 2021


In the Chancellor’s first Budget speech last year, made as COVID-19 started to take hold in the UK, Rishi Sunak promised to do “whatever it takes to support the economy”.…

Contact us