A recent High Court case looked at the question of whether buyers under a purchase agreement can sue for damages for a breach of warranty by the sellers when the buyers had not carried out a proper due diligence under a due diligence condition, and where proper due diligence would have exposed the error in the warranty.
Background
Mr and Mrs Singh entered into an agreement to buy a lemon and kiwifruit orchard from Mr Rutherford and Ms Jolly. The sellers gave various warranties, including a warranty that the canopies for the kiwifruit plants and lemon trees were a certain size.
The agreement was also conditional on the buyers carrying out a wide ranging due diligence review of the property.
The agreement became unconditional and settlement was completed.
The buyers later became suspicious when the property did not produce as much fruit as expected. The buyers measured the canopies and discovered that they were smaller than what was warranted by the sellers. The buyers sued the sellers for damages based on this breach of warranty.
The sellers did not check the measurements themselves before giving the warranty. They either relied on measurements which had been carried out by their tenant, or they relied on assumptions.
The sellers argued that the buyers were experienced orchardists and should have measured the canopies themselves when they carried out the due diligence review.
The Decision
The judge noted that the buyers had placed a great deal of emphasis on the exact size of the canopies. Before they entered into the agreement, they had asked for confirmation of the size from the sellers, and the representations which were made were repeated in the agreement as a warranty.
The judge said that if a representation is made during negotiations for an agreement for the very purpose of inducing the other party to act on it, and it does induce the other party to act on it by entering into the contract, that is a prime facie ground for inferring that the representation was intended as a warranty.
In general, anyone giving a warranty assumes strict liability for what he or she warrants, and the person is responsible for the correctness of the warranty. From the innocent party’s point of view, the purpose in asking for a warranty is to protect against error.
The judge said that the buyers were entitled to rely on the warranty, and to receive compensation for the loss which they suffered as a result of the breach of warranty.
The judge said there was no good reason to focus on the buyers’ failure to properly carry out due diligence, rather than on the sellers’ breach of warranty. The whole purpose of the buyers seeking, and the seller giving, a warranty, was to give an assurance to the buyers as to the accuracy of what was warranted. When a warranty is given, that is likely to affect the expectations of the buyer. He or she can rely on the warranty. Someone who has been given a warranty may not focus their due diligence review on the matter that is warranted, or may undertake only a limited due diligence in relation to that matter.
Therefore, a warranty given by a seller to a buyer will not generally prevent the buyer from suing for breach of warranty just because the buyer did not carry out an adequate due diligence under a general due diligence condition.
Summary
In most cases, a buyer is safe to rely on a warranty in agreement, even if there is a general due diligence condition in the agreement.
However, just because a buyer may have a right to recover damages from a seller if a there is a breach of warranty, he or she would still have to incur costs in enforcing the warranty, and the right to recover losses will be of no use if the seller has no money or assets. It is therefore still better for a buyer to carry out a thorough due diligence investigation.
