38 law


Beware the distinction between a warranty and a representation


Those involved in the sale of a company or assets will be familiar with the often lengthy set of warranties contained within the sale agreement, writes Christopher Wilson, solicitor in the corporate team, Blandy & Blandy LLP


Warranties, usually the subject of much negotiation, are contractual statements which if proven to be untrue may give rise to a claim by the purchaser for breach of contract. A well advised purchaser will want to include wording in the agreement to the effect that the warranties also amount to representations.


If the purchaser can show that it relied upon these representations and was, as a result, induced into entering into the contract and that these transpired to be untrue, it may be entitled to make a claim for damages. Damages for a breach of contract are calculated on a basis that would put the claimant into the position it would have been in if the warranty had been true. Damages for misrepresentation,


however, are calculated on the basis of returning the claimant to the position that it would have been in had the misrepresentation not been made. The difference in the potential amount of damages recoverable can be significant.


The question of whether a warranty can also amount to a representation was recently considered by the High Court in Sycamore Bidco v Breslin. The potential damages for the breach of warranty could have reached £6 million whilst damages for misrepresentation could have exceeded £16m. The distinction was, therefore, crucially important.


The judge found that the warranties could not form the basis of a claim for misrepresentation, a decision that


Employers need to think before making promises


Companies should be careful when making statements at group employee meetings as ‘promises’ and ‘guarantees’ could be considered contractually binding, says Gardner Leader, Newbury and Thatcham- based solicitors and experts in employment law.


This advice follows a recent court decision to pay a group of bankers their bonuses after it ruled that a promise made by the CEO of Dresdner Kleinwort’s investment banking division was legally binding.


In 2008 the CEO promised at a


general "town hall" staff meeting that there would be a guaranteed minimum bonus pool of around £340 million to divide up based on performance.


The bonus pool had been approved by the board in an effort to stop key staff leaving as the business was being sold. The terms of the bonus were later set out in writing in December 2008, which added further conditions.


When Dresdner Kleinwort was subsequently taken over by Commerzbank, the bonus pool


contradicted a previous judgment on a similar issue. Amongst the reasons given the judge held that:


• the solicitors drafting the agreement understood the difference between a warranty and a representation and a distinction had been made in the drafting; and


• the warranties were never described as representations.


The case serves as a useful reminder of the importance of distinguishing between a warranty and a representation. When acting for a purchaser it is important to draft the sale agreement so that the warranties may also be treated as representations. Conversely when acting for a seller it is important that, wherever possible, all liability for any representations is removed from the agreement so


was reduced by 90%, relying on the “material adverse change” clause included in the letters to the staff in December 2008 and asserting that the staff communications were not contractually binding.


In 2012 the High Court ruled that the intention of the collective staff announcement was to create a legally-binding obligation and so the reduction in the bonus pool was a breach of contract. This decision was then upheld by the Court of Appeal in 2013.


The court also stated that when any new conditions are introduced into an existing contractual relationship, there would be a strong presumption that it was intended to be legally


that the purchaser’s remedies are limited to breach of contract.


Blandy & Blandy LLP is a leading Thames Valley law firm, offering fully integrated legal and financial advice to all its clients.


Details:


Christopher Wilson 0118-9516806, christopher.wilson@blandy.co.uk


binding. Therefore, it was down to the employer to make it clear if there was no intention to create a legal obligation.


As a result, the court ordered for the bonuses to be paid.


Julie Taylor, employment associate at Gardner Leader, explained: “This decision has significant implications for employment contracts and potentially opens the way for promises made by employers during general staff communications to become contractually binding. Employers will need to be very careful in the announcements they make at group employee meetings to ensure that a discussion remains just that.”


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THE BUSINESS MAGAZINE – THAMES VALLEY – JULY/AUGUST 2013


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