Posted On / 16.08.2016

Is a Breach of Warranty a Misrepresentation?

Update on Company Law:

Is a Breach of Warranty a Misrepresentation?

August 2016

Q. What's new?

The High Court in a recent case (Idemitsu v Sumitomo) decided that if you're out of time on a breach of warranty claim, you cannot claim instead for misrepresentation under the 1967 Act.

Q. Why is this important?

If you are buying a business either by share purchase, as with the case in Idemitsu, or via an asset purchase, you will rely on warranties given by the seller. These warranties should reflect the state of the business you are buying so you know you are not being sold a dud. Often the agreement will provide for a cut-off-point in time for breach of warranty claims to be made. If you delay past the deadline, the Court is saying that you can't extend the deadline by calling it a "misrepresentation" instead of a "breach of warranty". So if you know you have a breach of warranty claim, the Court says it's crucial that you claim within any time limit set out in the legal documentation.

Q. What is a warranty?

A warranty is a promise, which can be made "to the best of knowledge and belief", that something is true. In some business sales there can be more pages filled with warranties (often in a schedule to the main agreement) than there are pages in the main agreement. A general example of a warranty might be:

"No Proceedings have been threatened or so far as the Sellers are aware are pending by or against the Company, any Director or any person for whose acts the Company may be vicariously liable, and there are no circumstances reasonably likely to give rise to any such Proceedings."

Q. What is a misrepresentation?

A misrepresentation is a statement made by someone that is untrue, on which you rely and which persuades you to enter into the contract. It is dealt with by the Misrepresentation Act 1967.

Q. What is an "entire agreement" clause?

This states that only what is written in the agreement binds the parties, and nothing else. Idemitsu used the inclusion of an "entire agreement" clause as another justification for its decision, meaning that pre-contractual representations, even if untrue, are irrelevant unless they appear in the agreement itself, but, even if they do appear as a warranty, then any claim has to be made within any given deadline to be valid.

If you have a breach of warranty claim, do not delay in making it, and if there is an "entire agreement" clause in your purchase documentation, do not rely on statements made by the Seller unless they are warranted in the agreement itself.

If you want to discuss buying or selling your company and warranties and their effect, please contact Brian Levine on 01935 846258 or at brian.levine@battens.co.uk

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