A key issue for lawyers dealing with contractual matters is how you define the different types of contractual terms. Particular difficulty may exist in how a lawyer may identify the difference between a ‘warranty’ and a ‘representation’. This difficulty exists because very often you will see the two terms grouped together. For example the terms may be familiar to corporate lawyers who may see a clause such as:
«The seller represents, warrants and undertakes that»
For this reason there is very often confusion as to how the terms may be differentiated when they are grouped together. However, the difference can be critical as was illustrated in the recent case of: Sycamore Bidco Ltd v Breslin and Dawson [2012].
In this case the difference was whether the seller ‘Breslin and Dawson’ was subject to a 16.5 million pounds misrepresentation claim or a 6 million pound claim for breach of warranty.
The facts of the case were that Sycamore had acquired a company from Breslin and Dawson for £16.5 million under the terms of a share purchase agreement. After purchase, the buyer discovered errors in the sellers accounts which they had relied on when purchasing the business. The agreement had been subject to a number of express warranties in the share purchase agreement relating to the value of the accounts. However, liability for these warranties had been expressly limited. Sycamore Bidco Ltd sought to argue that these had in fact been false representations which had induced them into the contract (liability for these representations was unlimited).
Difference between Warranties and Representations
The key difference between a representation and a warranty is the remedy available to the receiving party.
A Representation is a statement of fact which is relied on by the receiving party and induces them to enter into the contract. It is normally before the contract, but may be repeated in the contract as well. A party may claim misrepresentation where a false representation has been made. They may be entitled to rescind the contract, which means that the contract would be set aside and the receiving party may also be entitled to damages to put them back into the position they would have been had the contract never been entered into.
A warranty is a statement of fact contained in the contract. If it is not true the receiving party has a claim for breach of contract. If it is a fundamental breach the receiving party may have the right to terminate the contact in addition to a claim for damages. However, unlike a claim for misrepresentation, the contract is not undone/
Key Considerations
The judgment in sycamore, indicates that parties need to consider carefully how they wish to use the terms ‘representations’ and ‘warranties’ and in particular if they are to be separately defined in the contract (giving rise to different remedies in the event of a breach.)
Legal English Vocabulary
Consider the vocabulary below and check your understanding of it in the context of the article.
to rescind a contract
repudiatory breach of contract
misrepresentation
false inducement into a contract
express warranty
to expressly limit a warranty