Pro­mot­ers and sell­ers be­ware : wrong­ful

Libertatem Magazine - - Content - Bharat Anand and Satish Padhi. Cor­po­rate Prac­tice Group, KHAI­TAN & Co.


Rep­re­sen­ta­tion and war­ranties are in­tensely de­bated dur­ing ne­go­ti­a­tion of M&A con­tracts. Se­ri­ous con­se­quences can arise due to a poorly ne­go­ti­ated rep­re­sen­ta­tion and war­ranties pack­age. In the con­text of a typ­i­cal M&A trans­ac­tion, rep­re­sen­ta­tions and war­ranties con­tain state­ments made by the seller as to the qual­ity, con­di­tion, value or na­ture of the busi­ness/ en­tity that the buyer is ac­quir­ing from the seller. Fur­ther­more, these rep­re­sen­ta­tions and war­ranties are gen­er­ally backed by the seller’s ac­knowl­edg­ment that the buyer is entering into the trans­ac­tion in re­liance of such pro­vi­sions. This en­sures that a buyer can claim breach of the ac­qui­si­tion agree­ment and seek a remedy against the seller for its losses if the rep­re­sen­ta­tions and war­ranties turn out to be un­true. This buyer/seller dy­namic raises sev­eral in­ter­est­ing ques­tions. For ex­am­ple:

•Is a duty cast upon the seller to dis­close all ma­te­rial facts to the buyer?

•Is there any dif­fer­ence be­tween the con­se­quence of breach of rep­re­sen­ta­tion and breach of war­ranty?

•What kind of losses can a buyer re­cover un­der In­dian law?

•Im­por­tantly, does due dili­gence of the tar­get com­pany di­lute the rep­re­sen­ta­tions and war­ranties made by the seller?

This ar­ti­cle fo­cuses on an­swer­ing a few of such ques­tions and out­lines the ap­proach taken by In­dian Courts while in­ter­pret­ing rep­re­sen­ta­tions and war­ranties, thereby sug­gest­ing some key negotiating strate­gies.


The terms rep­re­sen­ta­tion and war­ranty are not defined in the In­dian Con­tract Act, 1872 (“Con­tract Act”). How­ever, through a se­ries of case laws, the phrase “rep­re­sen­ta­tion” has been un­der­stood to be a state­ment made by way of a pos­i­tive af­fir­ma­tion, based upon knowl­edge that the facts rep­re­sented ei­ther do or will ex­ist, or a mere dec­la­ra­tion of be­lief or ex­pec­ta­tion that such facts do or will ex­ist. Whereas, the Sale of Goods Act, 1930 de­fines a “war­ranty” as a stip­u­la­tion col­lat­eral to the main pur­pose of the con­tract, the

breach of which gives rise to a claim for dam­ages but not a right to re­ject the goods and treat the con­tract as re­pu­di­ated. The said def­i­ni­tion specif­i­cally ap­plies to an ac­qui­si­tion trans­ac­tion where there is sale of shares. The dis­tinc­tion be­tween rep­re­sen­ta­tion and war­ranty has been sur­mised by

the Madras High Court in All In­dia Gen­eral In­sur­ance Co v. S P Ma­h­eswari (“All In­dia Gen­eral In­sur­ance”, AIR 1960 Mad 484) wherein the Court stated that, “War­ranties are rep­re­sen­ta­tions which are made the ba­sis of the con­tract whereas a rep­re­sen­ta­tion is not strictly speak­ing a part of the con­tract or of the essence of it, but rather some­thing pre­lim­i­nary and in the na­ture of an in­duce­ment to it.”


The ex­pla­na­tion to Sec­tion 17 of the In­dian Con­tract Act, 1872 pro­vides that mere silence is not fraud, un­less there is a duty to speak, or un­less it is equiv­a­lent to speech. There­fore, there is no gen­eral duty to dis­close facts which are or might be equally within the means of knowl­edge of both par­ties. The prin­ci­ple has been aptly stated by Slade J in Banque Fi­nanciere de la Cite SA v. West­gate In­sur­ance Co. Ltd ([1989] 2

All ER 952) wherein it has been ob­served that: “There are count­less cases in which one party to a con­tract has in the course of ne­go­ti­a­tions failed to dis­close a fact known to him which the other party would have re­garded as highly ma­te­rial, if it had been re­vealed. How­ever, the law leaves that other party with­out a remedy.”

How­ever, in trans­ac­tions in­volv­ing con­tracts uber­rima fides or where one party stands in a fidu­ciary re­la­tion­ship with the other, there is a le­gal and eq­ui­table duty on the par­ties, not only to state what­ever is stated, but also dis­close the same with ut­most com­plete­ness. Other than that, there is no obli­ga­tion to dis­close at all in trans­ac­tions which do not fall within the recog­nised class; as was held in Haji Ahmed Yar Khan v. Ab­dul Gani Khan (AIR 1937 Nag 270).


In­ter­est­ingly, the Con­tract Act states that: “If con­sent was caused by mis­rep­re­sen­ta­tion or by silence, fraud­u­lent within the mean­ing of Sec­tion 17, the con­tract, nev­er­the­less, is not

void­able, if the party whose con­sent was so caused had the means of dis­cov­er­ing the truth with or­di­nary dili­gence”.

In World Sport Group (In­dia) Pvt. Ltd vs The Board of Con­trol for

Cricket in In­dia (Ar­bi­tra­tion Pe­ti­tion No. 978 of 2010 de­cided on 20-12-2010), the Bom­bay High Court ob­served that the mere plac­ing of a doc­u­ment on record of a com­pany, so­ci­ety or other such or­gan­i­sa­tion does not lead to the con­clu­sion that every officer thereof had the means of dis­cov­er­ing the truth merely by virtue of the doc­u­ment be­ing on the records. It was sur­mised that what con­sti­tutes or­di­nary dili­gence must de­pend on the facts of each case.

In In­finite­land Ltd. v. Ar­ti­san Con­tract­ing Ltd (2005 EWCA Civ 791) the par­ties had en­tered into a share sale agree­ment for the pur­chase of three group com­pa­nies of the seller. It was al­leged that the seller has over­stated the prof­its of one of the com­pa­nies which ex­ag­ger­ated the pay­ment con­sid­er­a­tion un­der the agree­ment. Due dili­gence was car­ried out on be­half of the pur­chaser by a char­tered ac­coun­tant. Clause 7.4 of the trans­ac­tion doc­u­ment pro­vided that “the pur­chaser’s rights in re­spect of breach of war­ranty should not be af­fected by any in­ves­ti­ga­tion made by it or on its be­half into the af­fairs of any group com­pany (ex­cept to the ex­tent that such in­ves­ti­ga­tion gives the pur­chaser ac­tual knowl­edge of the rel­e­vant facts or

cir­cum­stances)”. The Court held that the due dili­gence car­ried out by the char­tered ac­coun­tant gave the pur­chaser ac­tual knowl­edge of the mis­rep­re­sen­ta­tion, which was out­side the purview of Clause 7.4, and hence the war­ranties can­not be con­sid­ered to have been breached. Be­fore the de­ci­sion in In­finite­land, it was widely ac­knowl­edged that a seller was re­quired to pro­vide war­ranties about the com­pany whose shares were be­ing sold, any dis­clo­sures that he made to qual­ify those war­ranties had to be suf­fi­ciently clear and de­tailed to en­able the po­ten­tial breach of war­ranty to the at­ten­tion of the pur­chaser, as was laid down in Le­vi­son v Farin, [(1978) 2 All ER 1149] and Daniel Reeds Ltd v EM-ESS Chemists Ltd, [(1995) CLC 1405].

Further, in New Hearts Ltd v. Cos­mopoli­tan In­vest­ments Ltd [(1997) 2 BCLC 249], the share pur­chase agree­ment

in­cor­po­rated a clause which stated that: “It is hereby agreed and ac­knowl­edged by the par­ties that the War­ranties (. . .) are given by the Ven­dor sub­ject to mat­ters fairly dis­closed (with suf­fi­cient de­tails to iden­tify the na­ture and scope of the mat­ter dis­closed) in the Dis­clo­sure Let­ter in re­spect of which mat­ters the Ven­dor shall have no li­a­bil­ity to the Pur­chaser.” It was held that merely pro­vid­ing doc­u­ments that might bring the pur­chaser’s at­ten­tion to a mat­ter was in­suf­fi­cient and that the par­tic­u­lar breach must be ex­pressly brought to the at­ten­tion of the pur­chaser.

Given the above, re­gard­less of whether ex­ten­sive due dili­gence has been un­der­taken by a buyer, there is recog­ni­tion that mat­ters out­side the dis­clo­sure let­ter may some­times well weaken the buyer’s reme­dies un­der the Con­tract Act.


The dif­fer­ence in reme­dies avail­able in case of breach of rep­re­sen­ta­tions and war­ranties have been stated by the

Madras High Court in All In­dia In­sur­ance. The Court ob­served

that: “In the case of a war­ranty ma­te­ri­al­ity or im­ma­te­ri­al­ity of the fact war­ranted sig­ni­fies noth­ing. Its in­cor­rect­ness con­sti­tutes a de­fence to an ac­tion on the pol­icy, even though it be not ma­te­rial and be made in per­fect good faith. But, in the case of a rep­re­sen­ta­tion, the in­surer can avoid the pol­icy only by prov­ing that the state­ment is false and fraud­u­lent or that it was false and ma­te­rial to the risk. In other words, it is only a ma­te­rial mis­rep­re­sen­ta­tion that can avoid a pol­icy if the truth of the facts con­tained in the rep­re­sen­ta­tions be not war­ranted by the pol­icy.”

As per Sec­tion 19 of the Con­tract Act, the con­tract is void­able at the op­tion of the party who was in­duced by mis­rep­re­sen­ta­tion. Nor­mally, there are two reme­dies avail­able to a party one be­ing to elect to re­scind the con­tract; the other to seek en­force­ment of rep­re­sen­ta­tion, and in­sist upon be­ing placed in the same po­si­tion as if the con­tract were per­formed.

In a claim for dam­age, the con­tract is left in­tact, and the suit is to en­force it and sub­sti­tute mon­e­tary dam­ages for per­for­mance whereas in a suit for rescis­sion, the ob­ject is to avoid per­for­mance of the con­tract. There­fore, any or­der made on rescis­sion has its ob­ject in restora­tion of the par­ties to their orig­i­nal po­si­tion; the idea be­ing resti­tu­tion in

in­te­grum and the par­ties to be re­stored to sta­tus quo ante.

In re­scind­ing a con­tract, the courts act on the prin­ci­ple that, as the trans­ac­tion ought never to have been made, the par­ties are to be placed, as far as pos­si­ble, in a sit­u­a­tion in which they would have stood, if there had never been any such trans­ac­tion. The broad prin­ci­ple has been laid down in nu­mer­ous case laws as be­ing: “No man can at once treat the con­tract as avoided by him, so as to re­sume the prop­erty which he has parted with un­der it, and at the same time keep the

money or other ad­van­tages which he has ob­tained un­der it.” A sim­i­lar prin­ci­ple has been in­cor­po­rated un­der Sec­tion 30 and Sec­tion 40 of the Spe­cific Re­lief Act, 1963.

While nor­mally un­der a claim made due to wrong­ful in­duce­ment through mis­rep­re­sen­ta­tion, the courts have awarded dam­ages which are merely resti­tu­tory in na­ture but in in­stances where the wrong­ful rep­re­sen­ta­tion and war­ranty is linked to the per­for­mance of a con­tract, the court may award com­pen­sa­tion as well re­ly­ing upon Sec­tion 75 of the Con­tract Act which per­mits a party right­fully re­scind­ing a con­tract to com­pen­sa­tion for any dam­age which he has sus­tained through the non-ful­fil­ment of the con­tract. While award­ing the com­pen­sa­tion, courts ap­ply the prin­ci­ples laid down in Sec­tion 73 of the Con­tract Act which per­mits a party to claim for direct and con­se­quen­tial losses sus­tained dur­ing the per­for­mance of the con­tract. There­fore, pro­mot­ers and sell­ers have to be very care­ful be­fore mak­ing any rep­re­sen­ta­tions and war­ranties as they may be li­able for com­pen­sa­tion in ad­di­tion to dam­ages which are merely resti­tu­tory in na­ture.

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