ENGLISH 中文
phone email facebook linkedin wechat whatsapp

Can you rely on a Vendor’s assurance or do you need to investigate?

Monday 25 March 2019

In a normal sale and purchase of a business or a property, a vendor will give assurances as to the different aspects of the property or the business. Those assurances are called “warranties”. If there is a breach of any warranty, the vendor is liable to pay damages.

 

If a warranty given “induced” the purchaser to buy, breach of it may give rise to even a right to cancel. That will depend on how important that statement is.

 

So how much can you rely on a vendor’s warranties? And how much do you need to investigate the property or  business yourself?

 

NZ law in this area works on a “Buyer Beware” basis. A purchaser must carry out investigations. If they don’t, they do so at their own risk.

 

A prudent purchaser may require to warrant that they do not have knowledge of any information which may affect the value of what the purchaser is buying. This is more common for the purchase of business. Not infrequently specific warranties may be required. Often the Vendor is required to give the warranties at the time when the contract is signed, and to repeat the same warranties on settlement.

 

General warranties are qualified by disclosure of information by the vendor to the purchaser in the Purchaser’s investigation or “due diligence”. Often the vendor will provide information or documents relating to specific aspects of the property or the business. If that is the case, then any general warranties given by a vendor will be qualified by the disclosure. It is therefore important generally still to look through all the information provided by the vendor to be satisfied there is nothing that has been disclosed which may affect the value of the property or the business. Sometimes an issue may have no impact on the vendor but may have implications the purchaser. It is therefore always important for a purchaser to go further than what the vendor provides.

 

If the vendor has given a warranty about a specific point, can the vendor escape liability if the purchaser hasn’t investigated properly to discover that the warranty was inaccurate? A recent case Singh v Rutherford [2012] NZHC380 dealt with this point. That case concerned the sale of a fruit orchard by Mr Rutherford to a Mr and Mrs Singh. The vendor provided a written warranty that areas of the plants and trees were of certain canopy dimensions. After the purchase was completed, the purchasers found that the stated canopy areas were materially overstated. The purchaser sued for a breach of warranty, claiming loss of production and profits for a 10 year period.

 

The contract contained a detailed due diligence condition. The purchaser had failed to carry out due diligence. The vendor argued that the material discrepancies in the canopy areas were not discovered due to the purchaser’s own inadequate investigation. The vendor argued that the damages suffered by the purchasers were due to their own negligence rather than a breach of the vendor warranty.

 

The High Court in that case held that the due diligence condition does not relieve the vendor from a warranty which was given specifically. The purchaser is given the right to carry out due diligence, but is not obliged to carry out due diligence.

 

My interpretation of that case is that the warranty given was very specific and as such the vendor should be held accountable for that. If the vendor’s warranties were more general, I believe that it would have been up to the purchaser to carry out their own investigations.

 

This is the case especially where the vendor was not actually aware of a situation which was outside of their reasonable control, but the purchaser in carrying out investigation became aware of it. In those cases, regardless of what the vendor stated, the Courts have in general not held the vendor liable for failure to disclose any material information, even if there is a warranty requiring the vendor to do so.

 

An example of this is Tasman Liquor Company Ltd v Nine Paddocks Ltd [2009] NZCA593.

 

One must always remember that the best time to enforce any breach of warranty is if the purchaser discovers the breach before they settle the purchase. At that point the ability to obtain some redress will be easier, as it is possible to attempt to negotiate a reduction in the balance payable to the vendor. The other point that a purchaser should note is that the conduct of the purchaser in dealing with the information made available to it or is relevant in assessing damages. In the case of especially the purchase of a business, the value of the business could be based on future cash flows based on what a purchaser expects to achieve post settlement. The effect of the purchaser’s knowledge, decisions, and approach in those circumstances would be relevant to the assessment of loss. Any mistake or lack of due diligence by the purchaser could go to reduce the extent of the damages. (see Beer, Spirts, and Wines (NZ) Ltd v Pernod Ricard NZ Ltd [2013] NZCA625. )

 

In summary, a vendor needs to take care when making any specific warranties in an agreement. If in doubt, they need to disclose the issues which may affect how a warranty they have given will be interpreted. A purchaser on the other hand must carry out due diligence and take care in doing so.  If information is provided by the vendor, it will be up to the purchaser to investigate the information thoroughly. It would be prudent for them to go beyond that information, as the vendor may be unwilling or unable to give full warranties. Ultimately, how a purchaser will maximise the value of a property or profitability of a business will depend on their own knowledge, decisions, and approach.

 

Teresa Chan

 

 

This article is for general use only. Advice should be sought for specific circumstances. Please consult Teresa Chan at Teresa Chan Law Limited, Level 3, Westpac Building, 106 George Street, Dunedin 9016, ph. 477 1069, or email teresa@tchanlaw.co.nz

 

KEYWORDS: vendor purchaser warranty warranties due diligence
Dunedin Shanghai Association property law section ADLS