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An Important Reminder of the Need for Careful Drafting in Agreements

Marriott Harrison LLP

London, United Kingdom

The recent case of Sycamore Bidco Ltd v Breslin [2012] EWHC 3443 (Ch), highlights the importance of precise drafting in ensuring that warranties and representations are only given where intended.

The case related to the sale of a company (the “Company”), where in the sale agreement (the “Agreement”), the sellers gave an express warranty that certain pre-transaction audited accounts (the “Accounts”) were accurate. After completing the purchase, one of the buyers claimed there had been errors in the Accounts which meant the Company’s turnover had been overstated.

The buyers brought a claim for breach of express warranty and also for misrepresentation on the basis that each express warranty should also be construed as a representation. A successful claim for breach of an express warranty was quantified in the region of £6 million, whereas a successful claim for misrepresentation was quantified in the region of £17 million.

The reason for the difference was because damages for a claim for misrepresentation aim to put the party back to its pre-contractual position, whereas damages awarded for a contractual claim for breach of warranty, aims to put the claimant in the position it would have been had the warranty not been breached. The consequence of this is that potential damages for misrepresentation may sometimes be far greater than those in a contractual claim for breach of warranty, as was the case here.

The outcome depended on whether the parties intended for each express warranty to also be a representation. The key to making such a determination was to be found in the way in which the Agreement had been drafted.

The Court determined that it was the intention of the parties, as reflected in the terms of the Agreement, for each express warranty to only be a warranty and not also to be a representation.

This case gives rise to several important considerations for those drafting corporate agreements:

  • Whether a statement is a representation or warranty is a matter of contractual interpretation to be decided on a case-by-case basis.
  • Precise drafting is the key to providing greater certainty.
  • If parties intend warranties to also be representations, they should be described as such.
  • If parties intend warranties to not be construed as representations, then all language referring to representations should be excluded from the agreement and a detailed ‘entire agreement’ clause excluding claims for misrepresentation should be contained in the agreement.

For more information about Marriott Harrison LLP, please visit www.marriottharrison.co.uk or the International Society of Primerus Law Firms.

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