Breach Of Warranties And Representations Notes

Breach of Warranties / Representations TASK

1. What are the warranties within the context of a SPA? What remedies would be available to a buyer for a breach of such warranties?

• Warranties are contractual statements about what is to be acquired.

• They are made by the seller in favour of the buyer, covering wide range of aspects of target

  • E.g. accounts, subsisting contracts, employees, pensions, intellectual property rights, etc.

• For share acquisition, the warranties will include statements about the shares to be acquired & the target company.

  • E.g. the shares are not subject to any charges, as well as about the company which is being transferred.

• If warranties are untrue, buyer will have claim for damages against the warrantor(s) for breach of contract.

• Rule in Hadley v Baxendale, applies. Loss must fall within one of the two following categories:

  • loss which flows naturally from the breach;

  • loss which was fairly and reasonably in the contemplation of both parties, at the time they entered into the contract, as the probable result of the breach..

    • Aim is to put the buyer in the position it would have been in if the contract had not been breached, subject to the duty to mitigate.

    • This measure of damages allows recovery for loss of bargain.

    • Loss = difference between value of shares/asset if the warranty had been true and their actual value.

2. When might a warranty given in a SPA also be a representation? What remedies would be available if such representation subsequently proves to be incorrect?

• Representation = statement of fact made by seller to buyer that induces buyer into the contract Likely that any representation made by seller in pre-contract discussions & negotiations which induce buyer to enter

• Warranty may be a representation – need to look at the warranty

  • Promise about title of shares probably induced buyer, however stat books are up to date = warranty, but did it induce the buyer? Needs to be decided on the facts.

• Remedies = claim for tortious damages & rescission

  • S1 MA 67 - where a misrepresentation has become a term of the contract, this will not affect the innocent party’s right to rescind (provided none of the equitable bars operates).

  • s2(2) Misrepresentation Act 1967 - court ‘may award damages in lieu of rescission’ for innocent or negligent misrep.

  • In order for the court to award damages in lieu of rescission, the right to rescind...

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