Warranties - Idemitsu Kosan Co Ltd v Sumitomo Co Corp [2016] EWHC 1909 (Comm)

Can warranties constitute statements of fact which are actionable as misrepresentations?

The facts

The claimant, Idemitsu, entered into a sale and purchase agreement (SPA) with the defendant, Sumitomo, on 12 November 2009. The SPA related to the sale of a subsidiary of Sumitomo to Idemitsu. The key clauses included: (i) Sumitomo gave warranties set out in Schedule 4 as to past and present facts about the subsidiary; (ii) Schedule 6 precluded claims which were not notified to Sumitomo within 18 months of completion; and (iii) there was an entire agreement clause in clause 12, whereby Idemitsu agreed it had not relied on any representations, warranties or undertakings other than the warranties as defined.

Idemitsu failed to claim for breach of the warranties in time, so sought damages for misrepresentation instead. As part of its claim, Idemitsu argued that in providing an execution copy for signature, Sumitomo had made representations to it, prior to the conclusion of the SPA.

The decision

The High Court deputy judge was clear that when a seller, by the terms of the contract by which he sells, "warrants" something about the subject matter being sold, he is making a contractual promise. He is not purporting to provide information and is not making a statement to the buyer. He determined (following reasoning in Sycamore Bid Co) that 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 other party that might lead to a misrepresentation claim. Schedule 4 was not by its nature a set of statements of fact but the agreed means by which the parties chose to define the warranties. In any event, the SPA contained a clear entire agreement clause, by which Idemitsu undertook not to claim it had relied on or been induced into the SPA by anything other than the warranties.

The judge was also clear that Sumitomo's provision of the execution copy for signature communicated no more than a willingness to give a certain set of contractual warranties in a concluded contract. Therefore, Sumitomo made no representation to Idemitsu by the execution copy.

Why is this important?

 The case reminds us to focus on the effect of warranties and representations in a contract, and to draft accordingly. Corporate lawyers are highly tuned in to this issue in the acquisition context (as seen by the construction of the SPA in this case), but commercial lawyers may not focus as much.

And providing your client with a claim for an actionable misrepresentation may prove much more valuable than a straight breach of contract claim related to a warranty breach.

Any practical tips?

When drafting, work out what should rightly be a warranty or representation (or indeed an undertaking), and express it as such. And whatever the position, remember the impact (and value) of an effective entire agreement clause.