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Unwinding an SPA: Claiming for a misrepresentation or a breach of warranty

We recently discussed claims for a breach of warranty in a share purchase agreement (SPA). In that blog , we focused on the elements you need to prove to bring a breach of contract claim. Today, we consider how to bring a tortious claim in misrepresentation, and the reasons why you may choose to frame the claim this way.


What is misrepresentation?


A misrepresentation is an untrue statement of fact from one party that persuaded the other party to enter into a contract.


To illustrate the point, we’ll take a very crude example; a seller of a business tells a potential buyer that their profits average £5 million a year, and that ‘fact’ induces the buyer to go ahead and offer a tidy purchase price for the business. On the face of it, if that statement turns out to be incorrect and profits were only £500,000 a year, it’s possible that the original statement was a misrepresentation.


How is it different to a breach of warranty claim?


A misrepresentation claim is likely to be a separate claim to a breach of warranty claim. That’s because a representation has induced a person to enter the contract, but a warranty is a term of the contract.


For that reason, it can be a stretch to plead both causes of action in the same claim. But, it’s not impossible to lead with one claim and plead the other in the alternative.


Reasons to plead misrepresentation


So why would you frame a claim as a misrepresentation claim rather than breach of warranty claim?


The main reason is the possibility of getting out of the contract completely. If you are successful in a misrepresentation claim, one of the remedies available to you is recission.

Secondly, the measure of damages in a claim for misrepresentation is more expansive than a claim for breach of contract. The measure of damages in a misrepresentation claim is the difference between the true value of the business and the price that the buyer paid.


Finally, in the most serious circumstances, the buyer may be concerned that he/she has been defrauded out of the purchase price. If the buyer thinks that the seller has been unscrupulous, to the point of fraud, they may view it as a risk that the seller will take the money and run (or dissipate the assets). In those circumstances, it may be possible to get an urgent injunction to freeze the assets of the seller, by pleading fraudulent misrepresentation.

Reasons not to plead misrepresentation


A claim in misrepresentation is not straightforward and it is typically more difficult to prove than a breach of contract claim. There are a number of hurdles to overcome, each of which have their own evidential issues. The claimant needs to show that:


  • Representations were made prior to the contract being concluded: possibly provable through emails and / or meeting notes

  • that the person making those representations knew that they were false: very difficult to prove. Perhaps a document in the defendant’s possession can contradict what they told the claimant.

  • that the person receiving the representations relied on them: there were material reasons for the claimant to enter the contract.

  • and that reliance induced them to enter into the contract: or was it something else that persuaded them to enter the contract?

Even if the claimant is confident in proving those four elements, the claim may be beaten by other clauses in the SPA, such as an entire agreement clause or a non-reliance.


One of the standard clauses in an SPA is an exclusion for innocent or negligent misrepresentation. That means that a claim in fraudulent misrepresentation is still available, but the evidential burden is much higher.


You have to prove the defendant’s subjective state of mind, which is very tricky. You need to be able to prove, on the balance of probabilities that the defendant knew that their statement was false, or they did not believe that the statement was true, or they were reckless as to the truth of the statement. As you can imagine, proving somebody else’s state of mind is extremely difficult.


Conclusion


A claim in misrepresentation is more complicated and probably more costly than a breach of warranty claim. But if you want to unwind the contract completely, then it’s the only way to frame the claim. There are a number of evidential hurdles to overcome so the disclosure exercise and witness evidence will be crucial to the success of the claim.



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