In a recent case heard in the High Court, Idemitsu Kosan Co., Ltd -v- Sumitomo Corporation , it was held that statements of fact which were warranted by the seller in relation to a sale of shares were not representations and as such, not capable of being the basis of an action for misrepresentation.
Idemitsu and Sumitomo are large Japanese companies which operate in the energy sector. Sumitomo and its wholly-owned subsidiary Sumitomo Corporation Europe Limited ("SCEL"), owned all of the shares in Petro Summit UK Limited ("Petro"). In November 2009 the three companies entered into a sale and purchase agreement (the "SPA") whereby Sumitomo and SCEL sold there shares in Petro to Idemitsu for the sum of US$575 million.
The SPA provided for SCEL to give certain warranties and for Sumitomo to give all of the warranties set out in one of the schedules to the SPA.
It was alleged by Idemitsu that some of the warranties where not correct at the time that the SPA was signed. However, Idemitsu had not notified Sumitomo of the alleged claim it believed it had within the eighteen month time limit for warrant claims in the SPA and could not therefore make a claim for breach of warranty under the terms of the SPA.
As a result, Idemitsu claimed damages for misrepresentation under section 2(1) of the Misrepresentation Act 1967, seeking to recover losses in the amount of US$105.9 million which related to the operation of a floating production, storage and offshore loading vessel.
Idemitsu agued that the warranties entered into by the sellers were statements of fact which amounted to pre-contractual representations by Sumitomo to induce Idemitsu to enter into the SPA.
Sumitomo applied to the Court for summary judgement to dismiss the claim on the basis that it had no real prospect of success.
The High Court considered two main issues in reaching its decision. First, the wording of the SPA and what the warranties actually were. Secondly, what had been communicated by Sumitomo to Idemitsu before Idemitsu had signed the SPA.
In the course of analysing the warranties, the Court determined that they were promises to be considered to be a contractual guarantee which were correct on a particular date.
The Court considered previous conflicting caselaw as to whether or not warranties could only be considered to be contractual promises rather than representations.
The Court decided to follow the logic from the case of Sycamore Bidco Ltd -v- (1) Sean Breslin and (2) Andrew Dawson  and found that the warranties were warranties and in accordance with the terms of the SPA, should be considered to be nothing else.
By applying the principles set out by Mann J. in the Sycamore case, the Court decided that the act of concluding a contract which includes within it contractual warranties does not amount to, or involve, the making by the party giving those warranties of any relevant statement to the other party.
The Court agreed with Sumitomo and summary judgement was given in accordance with their application on the basis that the claim against them had no real prospect of success.
Breach of warranty claims are based on breach of contract and seek to put the injured party in the position they would have been in if the warranty had been true. On the other hand, a claim for misrepresentation can result in the rescission of the contract and the parties being returned to the pre-contract position, or financial compensation may be paid if required to achieve the same.
It is clear from this case that care needs to be taken in the wording relating to warranties and representations in sale and purchase agreements. It also emphasises the need for an entire agreement clause to be included to defeat the risk of a misrepresentation claim.
By Daniel Gardener
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