Blurred lines: when a warranty is really a representation

Can a warranty cross the line into an actionable misrepresentation? The answer: it depends on the drafting.

A promise of equity

Gopher acquired Finalto in 2022, beating a consortium led by Finalto’s CEO and COO, Hoffman and Greenbaum. Pending agreement of definitive documents, the parties entered into documents including an Equity Term Sheet promising Hoffman and Greenbaum equity in a holding company to be established post-completion, and a Management Warranty Deed under which they gave warranties to Gopher. After completion, Gopher ceased negotiating definitive documents, terminated Hoffman and Greenbaum’s employment and failed to establish the holding company. Hoffman and Greenbaum sued for breach of the Equity Term Sheet and unpaid termination entitlements. Gopher counterclaimed for fraudulent misrepresentation under the Management Warranty Deed.

Interim measures, lasting consequences

A preliminary question was whether the Equity Term Sheet created binding obligations at all. The High Court rejected Gopher’s argument that the obligations were conditional upon a structure being agreed and implemented post-acquisition. Rather, the agreement imposed binding obligations that would be superseded by the definitive documents once agreed. Gopher’s instruction to “down tools” on negotiations was among the matters manifesting a repudiatory breach.

From warranty to representation

The court then considered whether a warranty could give rise to a misrepresentation, noting that a representation is pre-contractual and a warranty arises on execution. A warranty therefore cannot constitute an actionable representation “without more”.

The court found the statements in the Management Warranty Deed were not confined to being warranties, for four reasons:

1. Informational nature: many of the statements conveyed information unlikely to be within Gopher’s knowledge.
2. Pre-contractual exposure: drafts were shared and the interim documents signed before the Share Purchase Agreement.
3. Internal indicators: the Management Warranty Deed contained language presupposing that representations were given.
4. External indicators: another document used language envisaging that representations could be given in the Management Warranty Deed.

Despite finding that the warranties were capable of being actionable representations, the counterclaim failed because the statements were not untrue, not fraudulent and rescission was unavailable.

A cautionary tale

A promise made provisionally is still a promise, and its breach carries real consequences. Whether a warranty crosses the line into an actionable representation remains fact-sensitive, but the court’s willingness to look at substance over form serves as a reminder that careful drafting is essential.

Judgment: Hoffman v Finalto