Man signing contract

Claims under warranties or for misrepresentation – the debate continues

Buying a business ought to be a positive experience, but what happens if the acquisition goes wrong? What can an injured buyer do to seek redress?

As a general proposition, a buyer will be able to sue for breach of warranty and/or misrepresentation. However, the two types of claim are very different and can lead to significantly varied outcomes.

1. Warranties

A warranty is a contractual promise (which is secondary to the main contractual promise) about the condition or quality of certain assets, the historical performance of the business, or the accuracy of information contained in the sale agreement or in the schedules.

As the warranty is collateral to the main contractual promise generally a breach of warranty cannot lead to the termination of the agreement (unless the breach of the warranty itself goes to the fundamental performance of the whole contract).

Proving a breach of warranty is relatively easy as it is simply a case of showing that the particular asset has not come up to the warranted standard or that the information subject to the warranty is not accurate.

The measure of damages is the difference between the price paid for the asset and the value of the asset had the warranty been accurate.

Warranties can be limited in a number of ways:-

  • If the purchase involves the acquisition of multiple assets then a warranty can be applied to individual assets (so avoiding the risk of the whole agreement being terminated if one asset does not meet the standard warranted for);
  • By reference to a value, so for example to a specific sum (i.e. a warranty claim will not exceed an aggregate amount of £100,000), or with reference to the purchase price;
  • By limiting the time within which a claim can be brought. Generally, claims for breach of contract are bought within six years of the date of the breach, but this can be varied in the contract itself. Clauses limiting claims to be brought within 12-24 months of the date of completion of the acquisition are common.

2. Misrepresentation

A misrepresentation is an expression of fact or opinion made prior to the purchase of the business or assets on which the buyer relies, which then turns out to be inaccurate or false. It is not a contractual claim but is a claim for breach of duty (technically known as a “tortious” claim).

A claim for misrepresentation is more difficult to prove than a breach of warranty, in that the buyer needs to show that:-

  • The representations were made. If made orally then this may be the buyer’s word against the seller;
  • That the representations induced the buyer to buy the asset;
  • That the representations have subsequently proven to be inaccurate or false.

Some contracts will seek to exclude liability for a negligent or innocent misrepresentation but it is very difficult to exclude liability for a fraudulent misrepresentation (i.e. a false representation that is intended to mislead). It is not possible to contractually limit the value or the timeframe to bring a claim in relation to a claim for misrepresentation.

The measure of damages in a claim for misrepresentation is different to a claim for breach of contract; it will be the difference between the true value and the price paid. In addition, the buyer may be able to unwind the contract and refuse to perform any future obligations (subject to the buyer having not acted in any way that affirms the contract first).

3. Can a warranty also be a representation?

Much depends on how the sale agreement has been worded, and it is possible to expressly list the representations in the sale agreement and attempt to make them warranties.

However, in the absence of an express provision and as a general proposition, it is not possible to imply that a warranty is also a representation for a simple reason: warranties are contained in the contract whereas a representation must occur before the contract is concluded. The courts have determined that it is a conceptual step too far to say that a term in a contract could be said to have induced someone to enter into the same contract.

Clearly, therefore, any provision dealing with warranties and representations needs to be carefully and clearly drafted.

4. Why does the distinction matter?

The difference between the two types of claims is significant; in effect a complaint founded on the same facts could lead to two very different outcomes.

It is therefore important to decide which claim to pursue, bearing in mind that the threshold for proving a misrepresentation claim is higher. The claimant would need to show that representations were made prior to the contract being concluded, that the person making those representations knew that they were false, that the person receiving them relied on them, and that reliance induced them to enter into the contract.

Potentially, if a misrepresentation claim can be made to stick, the claimant may be able to achieve a better outcome than might be available if a claim was pursued under the warranties. Much depends on the wording of the contract and the facts giving rise to the claim, and specialist advice ought to be obtained before embarking on a particular course of action.

Peter Brewer is a partner in the commercial litigation team of Clarke Willmott LLP. If you would like to discuss anything that rises from this article or there are any other legal issues you would like help with please contact him on 0345 209 1718 or peter.brewer@clarkewillmott.com.