Commercial Contracts and Warranties

Commercial Contracts and Warranties

Contractual warranties cannot be actionable as a claim for misrepresentation, the court has confirmed.  At top Bahamas law firm ParrisWhittaker, the experienced commercial lawyers advise businesses of all sizes on their commercial contracts and their rights and obligations.

An important ruling1 in the UK’s High Court has clarified when warranties are not representations on the sale of shares.  The ruling has persuasive effect on the courts in The Bahamas.

What was the case about?

Company shares were sold to a buyer, who argued that various warranties in the signed share sale agreement were also representations (even though they were not expressly stated to be such).  Warranties are contractual promises, as opposed to information or statements provided by one party to another which often induce a party to enter into a contract. The measure of damages in the case of misrepresentation may be more advantageous than for a breach of warranty.

The buyer brought a claim for misrepresentation and breach of warranty, having discovered that the warranties were false.   The time limit for a breach of warranty had expired, however, the share sale agreement contained an ‘entire agreement’ clause under which the buyer agreed it had not ‘relied on, or been induced to enter into’ the contract by anything other than the warranties.

The High Court found that the warranties were not representations, and ruled that concluding an agreement that contains warranties does not mean a seller is agreeing that the warranties could be grounds for a claim of misrepresentation.

It also said the court would not extend the word ‘warranty’ beyond its natural and ordinary meaning – it will not imply them to be representations.  In addition, the court found that the entire agreement clause was ‘robust’, excluding any possibility that a warranty could be interpreted as a representation

The buyer therefore failed in his claims.  The warranties were warranties – and nothing more. The ruling has wider implications for contracts generally.  Warranties will not generally amount to representations – unless they are expressly state to be.

What does this mean?

Sellers of company shares should check the terms of their share sale agreement, particularly any warranties, and that there is nothing to state or imply that any warranties could amount to representations.  A robust ‘entire agreement’ clause should help the seller successfully defend a claim for breach of warranty (or for misrespresentation based on any warranties).

Buyers, on the other hand, may wish the share sale agreements to be worded so as to make warranties given by the seller on par with representations. If you have any concerns, we strongly urge you to take expert legal advice whether you are a buyer or a seller.

How can we help?

For expert, strategic legal advice on your commercial contracts, share sale agreements and related disputes, call the experienced commercial lawyers at ParrisWhittaker as soon as possible.  If you are considering buying or selling company shares, we can help you with clear, effective legal advice and representation to fully protect your interests. 

1 Idemitsu Kosan Co Ltd v Sumitomo Co Corp [2016] EWHC 1909