Call 07 834 6000

Seller Beware - Liability For Broken Promises

19 August 2013

Buyers and sellers often become focused on the financial aspects of an agreement and overlook the rest of the agreement. If you are buying or selling your property you should carefully consider the promises (or warranties) that are made by the seller in the agreement. If those promises are incorrect they can come back to bite you – as Mr Rutherford found in a recent case.

 

The case of the lemon and kiwifruit orchard

In Singh v Rutherford [2012] NZHC 380 Mr and Mrs Singh purchased a lemon and kiwifruit orchard from Rutherford for $1.2m. The agreement was on the standard form of agreement for sale and purchase of real estate. It was conditional on the Singhs being satisfied with a due diligence investigation of the property. The agreement also contained a warranty (or promise) by Rutherford that the orchard canopy covers of the lemon trees and kiwifruit vines were certain sizes. The Singhs undertook a fairly simple due diligence investigation before they purchased the property. They did not check on the canopy sizes of the lemon trees and kiwifruit vines. After the Singhs had completed the purchase they discovered that the canopy covers were not as large as Rutherford had promised. The Singhs sued Rutherford for $200,000 which they claimed was their loss of profits as a consequence of the reduced canopy size.

In the District Court the judge found that Rutherford had breached the warranty regarding the canopy sizes. However, the judge said that the Singhs could not claim losses against Rutherford because they should have measured the canopy sizes when they undertook their due diligence investigation.

The Singhs appealed the District Court judge’s decision. The High Court judge decided that the Singhs were entitled to rely on the warranty and claim their losses, even though the agreement contained a due diligence condition. The judge said that a person who makes a warranty undertakes strict liability for the promise and assumes the risk that his or her belief might be mistaken.  This means the person who makes a warranty that turns out to be incorrect will be liable even if he or she believes the warranty is correct.

Although the High Court judge did not agree with the Singhs’ expert witness as to how the losses should be calculated, the judge held that the Singhs could claim their losses. The judge held that the Singhs were not obliged to carry out the due diligence investigation and could rely on the warranty whether or not they decided carry out the investigation.

 

What can you learn from this?

The specific wording of any agreement is important and should be carefully considered. If you are selling or buying a property you should seriously consider the different warranties (or promises) by the seller that are included in the agreement. As the seller, you should consider whether the warranties are correct and how they can be limited. For example, your promises could be limited to the extent that you have not provided the relevant information to the buyer, or to the extent the buyer should have discovered whether the warranties were correct. You could also limit your liability by placing a cap on the amount of your liability or by preventing any claim being brought against you after a certain period of time.

 

Please email me with your ideas for future articles.  Keep an eye out for next month’s column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law.  With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.   Find out more about us at our website.