commercial contracts

Misrepresenting Warranties: can a freestanding warranty ever be a representation too?

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Summary: The recent case of Idemitsu Kosan v Sumitomo (2016) reminds us of the key differences between warranties and representations. It highlights the importance of reflecting this distinction properly in our contracts. It also provides a clear indication of the effectiveness of non-reliance wording in our entire agreement clauses.

What were the facts of this case?

The buyer (Idemitsu) alleged that certain warranties given by the seller (Sumitomo) in a share sale and purchase agreement between the parties were untrue on the date of the contract. It claimed that the seller, by providing a completed contract to the buyer ahead of the completion, was effectively representing that the warranties were accurate; the buyer then relied on this when deciding whether to sign the agreement or not. The buyer took this course since claims for breach of warranty under the contract were validly time-barred meaning the buyer’s options were limited to a claim for misrepresentation.

What was the decision of the court?

The court found in favour of the seller. It held that the warranties did not also constitute representations and dismissed the buyer’s representation claim. The court stated as follows: “if a contractual provision states only that a party gives a warranty, that party does not by concluding the contract, make any statement to the counterparty that might found a representation claim”.

Simply put, if the warranties are clear and are at all times described as warranties (steering clear of the “warrants and represents” wording), the court saw no reason to extend the words beyond their natural meaning. The court made it clear that by warranting something, a seller is not purporting to impart information or making a statement to a buyer but is instead making a promise which will be actionable as a breach of contract.

In addition, the relevant contract contained robust entire agreement and non-reliance wording whereby the buyer acknowledged that it had not “relied on, or been induced to enter into” the contract by anything “other than the Warranties”. This persuaded the court that the buyer’s claim for misrepresentation should fail.

Breach of warranty versus misrepresentation - does it make a difference?

The remedies for misrepresentation are very different to those available for a breach of a warranty.

A breach of a warranty generally allows the innocent party a right to bring a claim for contractual damages. If the effect of the breach is a repudiation of the contract, it will also allow the innocent party to terminate. The contractual measure of damages is the value of the promise – in other words, the idea is to put the party in the same position as it would have been had there not been a breach of the warranty in the first place.

The remedies available for a negligent or innocent misrepresentation, on the other hand, are designed to put the party in the same position it would have been in had the contract never been entered. Depending on the facts this may allow the innocent party to rescind the contract or, if this is not possible, to recover damages to reflect the above principle.

How does this apply to my commercial contracts?

The Idemitsu case was concerned with a corporate transaction but is equally applicable to any commercial contract you are looking at.

The first thing to consider is the intention of the parties. Have they agreed that the nature of the warranties are to be treated also as representations? As a customer, you are more likely to want the ability to claim for both a breach of warranty and a misrepresentation in order to access the wider range of remedies on offer. This case is useful as it reminds us that it can be important to use the words “and represents” rather than “warrants”. This is because the courts are likely to treat ordinary contractual clauses as warranties even if they are not specifically sign-posted as such. For example, where you have appointed a supplier based on its responses to a detailed RFP, it would be sensible to push for acknowledgement of the response – as well as any other statements made during the bidding process – as representations. This will help to ensure the widest available remedies should the relationship turn sour.   

As a supplier, be aware that ordinary contractual clauses may be treated as warranties even without the traditional “supplier warrants” wording. If specific representations are to be given, these should be considered carefully. The consequences of them turning out to be false may lead to consequences that you were not expecting. In the RFP example, as the supplier you need to make sure that your pitch team has truly represented its capabilities in the response and any subsequent correspondence, before agreeing to provide a representation of its accuracy. 

Entire Agreement Clauses

The Idemitsu case also acts as a useful reminder of the importance of getting the entire agreement clause right. A customer who only has made an obligation and promise to pay the supplier would normally be satisfied with a simple phrase such as “this is the entire agreement between the parties”. This does not prevent the customer from making a claim for any pre-contractual representations made by the supplier. All it does is indicate that there are no other collateral contracts and more is needed to exclude liability for misrepresentation.

To do this, a supplier would typically look to specifically confirm that:

  • no representations have been made;
  • no party has been induced to enter into the agreement as a result of any representations/no representations have been relied on; and
  • the customer has no remedy for any statements that are not set out in the agreement,

or some combination of the above. The objective is to stop the customer from trying to argue that representations were made (irrespective of whether that which is written in the contract actually reflects the reality of the situation). However, suppliers need to make sure that in doing so they:

  • are not totally rewriting history, as this will not work; and
  • consider UCTA as this type of clause is likely to be deemed a limitation of  liability. This is especially so where such wording appears in standard form agreements where the customer has no opportunity to negotiate and the parties are not of equal bargaining power.

What are the key lessons from this case?

Idemitsu provides a clear reminder of how the courts will interpret warranty and representation language in our contracts. It supports the view that a warranty on its own should be treated as nothing more than a bare contractual promise and, unless there is something more, will not be treated as an inducing statement. As a result, always take time before entering into an agreement to consider whether certain provisions have induced you into entering into it. If that is so, consider reflecting in the drafting those clauses as specific representations in addition to any warranties.

The case also shows that robust entire agreement clauses which include specific language for misrepresentation will stand up to judicial scrutiny and will prove invaluable – if you are a supplier. As a customer you will want to limit entire agreement clauses to “whole agreement” wording which does nothing more than confirm that the relevant contract is the only document regarding its subject matter.

You may also find this case useful to help justify your insistence on using the words “and represents” in addition to “the supplier warrants”.

 

Trainee Solicitor Robyn Lawrance contributed towards this Expert Insight.

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