In a share sale (whether of shares or assets) the principle of caveat emptor (buyer beware) applies. The law provides no statutory or common law protection for the buyer as to the nature or extent of the assets and liabilities it is acquiring. Hence, the need for extensive contractual statements in the form of warranties in sale and purchase agreements (SPA’s). It is imperative that the buyer of the shares ensures that they have comprehensive warranties that protect it from unforeseen liabilities and risks that they are not aware of following a due diligence exercise into the seller’s business. Conversely, the seller will seek to limit those liabilities to avoid worrying
about comeback from the buyer in the future.
Warranties are no less important on an asset purchase, even though the buyer does not inherit all the liabilities of the business. On an asset purchase, liabilities for the business will generally remain with the seller unless the buyer agrees to accept them. This is subject to exceptions, for example, the buyer will take on employment liabilities if the Transfer of Undertakings (Protection of Employment) Regulations 2006 apply. A recent case (Idemitsu kossan co ltd v Sumitomo ) has highlighted both the importance of warranties and the need to distinguish them from representations. There is a clear and important distinction, as they each give rise to different remedies for breach. As highlighted in the Indemitsu case, the starting position is that representations are statements of fact, normally pre contract, not a contract term and if the representation is false (and the buyer relies upon it), the buyer may have a claim for misrepresentation and the contract may be
voidable. Warranties, however, are contract terms and amount to contractual promises. If the warranty is not performed, the remedy is damages.
The buyer in the Indemitsu was prevented from bringing a warranty claim as there was a time limit in which they could bring the warranty claim (as is often provided in SPA’s). It followed that they bought the claim in misrepresentation arguing that the warranty statements were also capable of being representations. The court dismissed the buyer’s claim. It held that a contractual provision states only that the party is giving a warranty that does not, by concluding the contract, make any statement to the counterparty that it is actionable as a misrepresentation.
The court also made it clear that the buyer’s claim was also defeated by the entire agreement clause in the SPA, under which the buyer agreed and acknowledged that it had not relied upon any representations or warranties other than those set out in the SPA.
This case highlights that buyers will face difficulty in successfully arguing that warranties in an SPA are also actionable in misrepresentation. From the seller’s perspective, a comprehensive entire agreement clause is the best defence to the risk of any inaccuracies in its warranties giving rise to a parallel claim for misrepresentation.