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A recent case demonstrates the importance of clear drafting in determining the extent of a seller’s liability to a purchaser for inaccurate statements made during the negotiation of a share sale, according to a corporate lawyer. “It is usual on an arm’s length share sale for a seller to give certain warranties to the buyer in the share purchase agreement regarding the state of the target company as at the date of completion of the transaction. It is also possible for a seller to be held liable for certain statements relating to the target company, made while negotiating the sale terms, although the seller usually attempts to exclude liability for any such misrepresentation. The recent High Court case of Idemitsu Kosan Co Ltd v Sumitomo Co Corp has illustrated the importance of incorporating an express exclusion into the sale contract.”
Mr Round continues, “the case concerned the sale of shares in a company in the energy sector. The purchaser claimed that certain statements made in the warranty schedule to the share purchase agreement were incorrect. As the limitation period for warranty claims had expired, the purchaser sought to argue that the substance of the warranty schedule also constituted a set of representations by the seller, separate from the contractual warranties, and that such representations had been given when the seller presented the proposed final version of the sale agreement for approval by the buyer.”
According to Mr Round, a claim for misrepresentation would not have been subject to the limitation period for warranty claims, and would also have resulted in a different measure of damages. “It was therefore important to demonstrate that the seller had made representations, in addition to giving the contractual warranties. The share purchase agreement, however, contained a clause under which the buyer had acknowledged that it was not relying on any representations or warranties other than the warranties contained in the sale agreement. The court granted summary judgement to the seller on the basis that it did not believe the purchaser’s case would have had a real prospect of success at trial. The court made a distinction between warranties and representations, and held that delivering the draft contract merely evidenced a willingness by the seller to give the contractual warranties in the agreed terms, rather than constituting a representation. The express exclusion of liability for misrepresentation was also clearly important in demonstrating the parties’ intention that the seller should not be liable for misrepresentation.”
Mr Round concludes, “It is possible that in similar circumstances a seller might have been held liable for misrepresentation, if the contract itself had, as do many first draft agreements prepared by the buyer’s advisors, referred to the seller giving both warranties and representations, and had not contained an express exclusion of liability for the latter. It is therefore crucial for any seller to be properly advised on the likely implications of the terminology used in a sale agreement.”