English contract law case profile - November 2016

The case of Idemitsu Kosan Co, Ltd v Sumitomo Corporation [2016] EWHC 1909 (Comm) dealt with whether a warranty can be construed as a representation of fact and therefore give rise to a claim under the Misrepresentation Act 1967.

Idemitsu Kosan Co, Ltd and Sumitomo Corporation and its wholly-owned subsidiary Sumitomo Corporation Europe Limited, entered into a share purchase agreement on 12 November 2009 (the SPA), in which Idemitsu acquired the entire allotted and issued share capital of Petro Summit Investment UK Limited.

Several years later, Idemitsu discovered that Petro Summit was subject to substantial liabilities arising from a dispute over the operating expenses of a floating production storage and offshore loading vessel.

Schedule 4 of the SPA contained a number of warranties by Sumitomo. However, clause 2.1 (a) of the SPA prohibited Idemitsu from bringing a claim for a breach of those warranties more than 18 months after the execution of the SPA.

Idemitsu consequently brought a claim for $105.9m against Sumitomo under s.2 (1) of the Misrepresentation Act 1967, arguing that the warranties provided by Sumitomo were also factual misrepresentations that had induced Idemitsu to enter into the SPA and caused it loss.

The court followed Mann J.’s judgment in Sycamore Bidco Ltd v (1) Sean Breslin, (2) Andrew Dawson [2012] EWHC 3443 (Ch) and held that the contractual warranties were warranties only and not representations of fact.

The court held that the fact that the content of a warranty could be construed as a statement of fact is not enough and that the SPA itself must support that this was intended by the parties to be a representation, capable of raising a claim under the Misrepresentation Act 1967. In this case, the drafting of the entire agreement clause at clause 12.12.3(a) of the SPA was a clear indication of the parties’ intention to exclude all representations. Sumitomo sold Petro Summit subject to contractual warranties detailed in Schedule 4, which, if breached, would entitle Idemitsu to claim for breach of warranty. The fact that Idemitsu was time barred from bringing such a claim was a matter for Idemitsu as a result of the bargain it had struck.

This case has a number of points of significance for technology companies. The first is that warranties and representations are, despite frequent lapses and short-hand in draftsmanship, generally not interchangeable terms, not least given that they have different remedies and measures of loss. As such, the court is unlikely to be persuaded that a breach of warranty gives rise to a concurrent claim for misrepresentation (particularly if it transpires that, for whatever reason, there is a bar to bringing the breach of warranty claim - as to which see further below) unless there is clear contractual wording establishing that that was the parties’ intention at the time that the agreement was executed.

The second point of importance is that parties must carefully negotiate, and then remain aware of for the life of the contractual relationship, any limitation periods, as these will provide a defendant with an absolute defence if exceeded and the courts will be particularly wary of litigation involving what appear to be time-barred claims that have been window-dressed so as to circumvent the limitation period. This is particularly important where the parties have negotiated and agreed a shorter than usual limitation period, because of the increased possibility that any subsequent claims are in fact dressed up time-barred claims.

The final, and perhaps obvious, point of importance relates to entire agreement clauses. If the buyer intends to rely on particular representations of importance in entering into the agreement, then these need to be specifically set out in the agreement and carved out of any entire agreement/non-reliance provisions.