Liability under a warranty and for misrepresentation
WEMYSS v KARIM (CA) [2016]
There are different measures for calculating damages depending on, for example, whether the claim is for a breach of warranty in contract or for misrepresentation (a false statement made before a contract on which a party relies when entering into a contract). Where both claims are available, a party is free to choose whichever measure achieves the better result. In this case, the Court of Appeal (“CA”) considered and gave some helpful guidance in relation to these different measures.
Facts:
- Mr Wemyss (“Seller”) sold a solicitor's practice to Mr Karim (“Buyer”) on the terms of an agreement (“SPA”) in 2008 with a purchase price of £100,000.
- During the negotiations for the SPA the Seller told the Buyer in an e-mail in 2007 that the turnover of the practice was “on course” for £640,000 during the year 2008 and that net income (ie profit) was “on course” for £120,000. The SPA included a warranty that: “… all other information relating to the Business given by … the Seller to the Buyer … are true accurate and complete in every respect and are not misleading”.
- The Buyer brought a claim against the Seller for misrepresentation and breach of warranty, maintaining that the turnover and profits were not “on course” for £640,000 and £120,000 respectively and that this statement was not true when it was made by the Seller.
- The judge in the High Court (“HC”) found that the Seller’s statement regarding the turnover and profits was not true when made and that the Seller did not believe it to be true at the time nor at the date of the SPA. By that date the Seller had access to management information which meant that the falsehood of what he had said was “blindingly obvious”. A more accurate figure for turnover would have been £547,000 or even less, and for profit would have been £92,000. The judge therefore found that liability against the Seller had been established both for misrepresentation and breach of warranty.
- Rather strangely, however, the judge declined to award the Buyer damages seemingly because of a lack of evidence of the extent of the loss suffered. The Buyer appealed.
Decision:
- The CA set out some of the principles regarding claims for breach of warranty and for misrepresentation. The measure of damages differs according to which cause of action is in play:
- where the claim is for a breach of contract, for example, breach of a warranty about the quality of an asset that is sold, the measure of damages is the difference between the true value of the asset and its value if it complied with the warranty;
- where the claim is in tort, the measure of damages is the difference between the true value of the asset and the price actually paid.
- The judge illustrated this with a scenario: suppose that A owns a painting that he tells B was painted by a famous artist. If it had been, it would be worth £10,000. B pays £8,000 for it but it was not in fact painted by the famous artist and was only worth £100. If B can establish that what A said was a contractual warranty, then he is entitled to £10,000 - £100 = £9,900. But if he can only establish that the statement was an actionable misrepresentation, then he is entitled to £8,000 - £100 = £7,900 although if the misrepresentation was (or is treated as) fraudulent he may be entitled to additional ‘consequential’ losses as well. Changing the facts, perhaps unrealistically, if the painting as warranted would have been worth £10,000 but is in fact worth £8,000, then on the contractual measure the buyer who paid £8,000 will recover £2,000; but on the tortious measure will recover nothing.
- Another important difference was mentioned by the CA: in a claim for misrepresentation the injured party must show that he relied on the representation in deciding to enter into the contract in circumstances in which it was reasonable for him to do so whereas in the case of a claim for breach of warranty, all that the injured party needs to prove is that the warranty has been broken.
- The CA confirmed the HC’s ruling that the Seller had made an actionable misrepresentation giving rise to a liability in tort. The Seller was also liable for breach of the warranties in the SPA giving rise to a contractual claim.
- The Buyer could choose which would be the better result for him but the difficulty confronting the judge was that there was no valuation evidence of either the true value of the business at the contract date nor the value that the business would have had if the warranted information had been true, complete and not misleading. In the absence of expert evidence, the CA awarded a sum that it felt reflected the difference between the value of the goodwill as warranted and its actual value.
Points to note:
- There is a general principle that an award of damages is not precluded simply because of difficulties in assessment. Where it is clear that the injured party has suffered substantial loss but the evidence does not enable it to be precisely quantified, this does not deprive the injured party of a remedy. Instead the Court will do its best to assess damages on the available evidence which may involve an amount of speculation.
- This is not the only case where it has potentially mattered to the parties whether a claim was brought for breach of contract or misrepresentation. In Sycamore Bidco v Breslin [2012] the injured party tried, unsuccessfully, to establish that a contractual warranty was also a misrepresentation due to the fact that a claim for misrepresentation would have been of greater value. Here the situation was effectively reversed (the contract claim was more beneficial) but the cases do demonstrate that the difference can be significant.
- This decision also shows the risks of being ‘cavalier’ with representations pre-contract. Although many agreements try to exclude a party from relying upon pre-contract representations, the Courts often find ways around such clauses where they feel it equitable to do so. Sellers/suppliers and their representatives need to be suitably warned.