When is a warranty not a warranty?

This decision is in some respects surprising, although it seems to us to be correct. In other cases on similar facts, the courts have taken different views. In one case, (cited in this judgment and said to have been wrongly decided)^[1] it was accepted that contractual warranties could form the basis of a claim for misrepresentation. In another^[2], although the misrepresentation claimed failed on the facts, the judge appeared not to take the "conceptual" or "timing" points referred to in our analysis. He accepted that an exchange of draft agreements containing warranties could amount to pre-contract representations in the form of the draft warranties. It remains to be seen if there will be an opportunity for the Court of Appeal to clarify the position.

The judgment also leaves uncertainty as to what contractual language is required to permit a warranty to operate as a representation. Given the point raised at 1.2 in our analysis of the case, would it be enough to have the sellers "represent and warrant" if, for example, the limitations on liability did not specify limits for claims in misrepresentation? Or would the point in 1.3 mean that the contract would need to provide that warranties are treated as if they were representations (because the "conceptual" and "timing" problems mean that they cannot actually be representations)? What about a recital stating that the sellers had, before entering into the contract, made representations to the buyer in the form of the warranties and that the buyer had been induced by those representations to enter into the agreement?

What is clear is that sellers should always remove any representation language from sale agreements. Alternatively, they should stipulate that any misrepresentation claim based on a warranty cannot give rise to greater liability than would arise under the corresponding contractual warranty claim. If a buyer cannot prove loss so as to find a remedy in contractual damages, it should not be allowed a second bite at the cherry through a parallel claim in misrepresentation.

Sellers should also ensure that buyers cannot make claims based on representations allegedly made outside the scope of the sale agreement (such as the "nice little runner" comment in pre-contract negotiations). A properly drafted entire agreement clause (stating that all the relevant terms are set out in the written contract) will take care of this issue, provided the exclusion of liability is reasonable in all the circumstances.

Other cases^[3] suggest that the contract should expressly state that the parties have not relied on any oral or written representation not contained in the contract documentation and waive any rights not conferred by the contract. Some commentators have gone so far as to state that the "entire agreement" and "non-reliance/waiver" provisions should be in separate clauses or sub-clauses. This is to ensure there is clear and separate provision both in the language of contract law and that of representation^[4].

However, note that no contractual protection will be effective where a representation is made fraudulently. A fraudulent misrepresentation is a false statement made knowingly, or without belief in its truth, or recklessly as to whether or not it is true.

Footnotes

[1] Invertec Ltd v De Mol Holding BV and another [2009] EWHC 2471 (Ch)
[2] Bikam Ood v Adria Cable S.a.r.l [2012] EWHC 621 (Comm)
[3] Notably, see Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc [2010] EWHC 1392 (Comm)
[4] See Axa Sun Life Services plc v Campbell Martin Ltd [2011] EWCA Civ 133