Sycamore Bidco v Breslin & Dawson No. 1 (2012)


Although various warranties included in a share sale agreement did not constitute representations and there had therefore been no misrepresentation by the sellers of the shares in the company, the inclusion of inappropriate amounts in the company accounts as turnover gave rise to breaches of the warranties.


The claimant company (S) claimed damages for misrepresentation against the defendants (B and D) in relation to its purchase of shares in a company (G).

S also claimed damages for breaches of various warranties in the share sale and purchase agreement (SPA), and for G's failure to account to some clients for commission rebates. G's business was insurance broking and consultancy. It was a subsidiary in a group of companies. B was principal owner of the group; D had a minority stake. S asserted that inappropriate amounts had been included in G's accounts as turnover, rendering the accounts inaccurate and giving rise to breaches of warranties. The amounts included compensation from a company (L) which provided information technology services to the group, and compensation from an insurance company (X) for loss of interest on premiums that G had collected as X's broker. S claimed that the terms of the warranties were also capable of being representations and therefore a misrepresentation under common law and/or under the Misrepresentation Act 1967.


(1) The warranties did not also constitute representations. The clear distinction in law between representations and warranties would have been understood by the draftsman of the SPA and was apparent from the SPA itself. The warranties were clearly described as such and there was no reason to extend the words beyond their natural meaning. In order to make the relevant material a representation one had to find something in the SPA which was capable of doing that. It was not enough that the subject matter of the warranty was capable of being a representation. The SPA contained significant limitations on liability under the "warranties". If the warranties were capable of also amounting to representations, then on the strict wording of the relevant clause such limitation would not apply to any misrepresentation. The sellers would thus be deprived of a large part of their protection, which would be a strange and uncommercial state of affairs, and could hardly have been intended. That consequence would be avoided if one construed claims under the "warranties" as including representations made in the warranty provisions, but again that would be a very forced construction. There was a conceptual problem in characterising provisions in the contract as being representations relied on in entering into the contract. Misrepresentation usually involved the making of a representation and, as a result, the entering into of the contract. That did not work where the only representation was said to be in the contract itself. S had expressly disclaimed the relevant representations having been made at any earlier time. There was no claim in misrepresentation, Invertec Ltd v De Mol Holding BV [2009] EWHC 2471 (Ch) not followed (see paras 200-211 of judgment). (2) The compensation from L should not have been included as turnover, but treated as "other income". Whether the error which led to a true and fair view of G not having been given was material, was one of subjective judgement. S had fulfilled the difficult burden of establishing the failure of the accounts to portray a full and fair picture and to comply with accounting standards. A company's turnover was a significant item for anyone viewing the accounts, demonstrated by the need to separate income into different categories. The fact that there had been a potential purchaser added weight to that significance and emphasised why an error would be material. It followed that there was, in that respect, a breach of warranty. There had also been a failure to include a related party transaction note, which was a further breach of warranty (paras 246-265). (3) Although the parties' experts agreed that any error in respect of the X compensation included as turnover was immaterial, it was relevant to the scale of the breach of warranty, which in turn potentially impacted on damages. However, no part of it should have been treated as turnover (paras 266-273). (4) The court was required to determine whether the failure to repay the client rebates, and instead include those sums as income, amounted to a breach of the client agreements. The rebates remained due; however, the failure to pay them was not a deliberate decision but more a decision based on uncertainty. There probably was a breach of an express term and the majority of the sums were capable of being material in the context of the contracts in question, but not in the context of the business, as they represented only a small proportion of turnover (paras 293-345). The policy in relation to rebates payable to "lost" clients was a fact or circumstance likely to give rise to material breaches of express terms, and was a breach of warranty, although its significance was not to be overstated. Its scope for having a serious financial impact on the business was very limited (paras 346-349). (5) With regard to the damages S were entitled to recover as a result of the breaches of warranty, the relevant loss was the difference between the purchase price and G's value at the date of the SPA (paras 390-466). (6) B and D were successful in their counter-claim for payments due from S under the SPA in respect of long-term incentive plans, under which they were entitled to a percentage of any sale of G (paras 469-489).

Judgment for claimant in part