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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.

Do you have any other questions? If so, be sure to get in touch. Our team of expert lawyers will be more than happy to help.

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Disclaimer: All legal information is correct at the time of publication but please be aware that laws may change over time. This article contains general legal information but should not be relied upon as legal advice. Please seek professional legal advice about your specific situation - contact us; we’d be delighted to help.
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