The importance of due diligence in farm purchases

The importance of thorough due diligence when purchasing a valuable farming property was recently emphasised by the High Court in Shabor Ltd v Graham.

The Farm

In 2014 the purchaser, Shabor, bought a large sheep and beef farm in Waikato (Property).

The Property was advertised as being able to “comfortably winter 7,500 plus Stock Units with capacity for more”. Shabor wanted to develop the Property into a deer farm.

After inspecting the Property once, Shabor submitted an unconditional tender for $5,250,110.

The tender documents included what the Court called a “non-reliance clause” under the terms and conditions.

The non-reliance clause said words to the effect that the vendors did not warrant the accuracy of any advertising of the sale of the Property, or any statement made in relation to it, and that a purchaser would be deemed to have relied on his own judgment, and not relied on any representation made by the vendors.

Shabor’s tender was accepted and Shabor took possession in June 2014.

The Claim

Shortly after taking possession, however, Shabor formed the view that the Property fell well short of being able to comfortably carry 7,500 stock units over winter.

Rather, Shabor’s view was that the Property could only carry around 5,500 (at most) stock units. Shabor claimed that, since taking over the Property, it had implemented a professionally recommended fertiliser programme and made a range of other improvements which had gradually lifted the Property’s carrying capacity.

However, by the time of the Court hearing, and despite spending many hundreds of thousands of dollars, Shabor alleged the Property was still not up to a carrying capacity of 7,500 stock units.

Shabor sued the vendors of the Property for pre-contractual misrepresentation, and for misleading and deceptive conduct pursuant to the Fair Trading Act 1985. Both claims focussed on the allegation that the representation in the written advertising that the Property could comfortably carry 7,500 stock units was false.

Shabor sought the funds it had expended (approximately $1 million) trying to lift the carrying capacity of the Property against the vendors.

Justice Fitzgerald found that, as at the time of sale, the Property could likely only carry 6,000 stock units, not the 7,500 stock units advertised.

With Shabor having proven that the vendors had misrepresented the stock carrying capacity of the Property, the Court then turned to consider whether Shabor had relied on this representation when purchasing the Property.

Non-Reliance Clause

The vendors claimed that Shabor could not have relied on the stock carrying capacity as recorded in the written advertising because the non-reliance clause in the tender documents prevented Shabor from doing so. And so the Vendors said, Shabor’s claim against the vendors must fail.

Shabor denied this and said it had reasonably relied on the written advertising and the Vendors were liable to Shabor’s its loss.

The Court was required to determine whether it was “fair and reasonable” for the non-reliance clause to prevent Shabor claiming it had relied on the vendors’ written advertising and suffered loss because of that reliance.

In determining whether it would be fair and reasonable for the non-reliance clause to be effective, the Court had to have regard to all the circumstances of the case, including the subject matter and value of the transaction, the respective bargaining strengths of the parties, and whether any party was represented or advised by a lawyer at the time of the negotiations or at any other relevant time.

The Court considered that the non-reliance clause should be conclusive between the parties.

That is, that Shabor should be prevented from relying on the stock carrying capacity written representation and its claim must for pre contractual misrepresentation must fail. The Court came to this conclusion for nine reasons.

First, this was a reasonably significant commercial transaction (involving a purchase price of over $5.2 million), not one involving consumers or the purchase of a residential property for personal use.

Second, Shabor’s principals were clearly experienced farmers in their own right, with deep farming knowledge; Shabor was therefore not a naïve contracting party, wholly dependent on information from their contracting counter-party.

Third, the non-reliance clause was an additional clause in the tender documents, and not “buried in the fine print”.

Fourth, the non-reliance clause was expressly directed to advertising materials.

Fifth, Shabor had possession of the tender terms and conditions, including the non-reliance clause prior to completing and submitting their tender.

Sixth, Shabor’s principals were clearly willing and able to make various amendments to the further terms of the tender documents, and indeed made a number of handwritten amendments on the very same page on which the non-reliance clause was located.

Seventh, Shabor’s principals were able to, and indeed did, obtain legal advice on the tender documents which included the non-reliance clause.

Eighth, the Court found that the vendors honestly believed the stock carrying representation, albeit mistakenly. There was no fraud or wilful concealment on behalf of the vendors.

Finally, and as part of “all the circumstances of the case”, the Court took into account that the principals of Shabor were obviously very keen to purchase a property and came into the tender process at a very late stage and yet, on the basis of one two hour visit, submitted an unconditional tender for more than $5 million. A point made by a number of the experts was that Shabor did not undertake sufficient due diligence in the context of a transaction of this significance.

For the same reasons the Court considered the non-reliance clause was effective in defeating Shabor’s claim under the Fair Trading Act.

Take Aways

As always, due diligence forms an important part of any farm purchase. In particular, obtaining appropriate legal advice with respect to tender documentation, and properly understanding the implications of the signing of the same, is crucial.

Although the non-reliance clause in Shabor’s case was determinative of its claim, as is evident, that was due to a number of facts which supported the non-reliance clause being conclusive as between Shabor and the vendors.

Non-reliance clauses will not always be conclusive between contracting parties, and indeed there are a number of cases where the Court has determined that a non-reliance clause does not prevent claims for pre-contractual misrepresentation by purchasers against vendors.

Lane Neave’s long history and background in the agribusiness sector means we are well placed to assist our clients in their pre-purchase due diligence for farms, or alternatively to assist where things have gone wrong post-purchase.

[1] [2020] 507
[2] At paragraph [137]
[3] Pursuant to section 50(1)(c) of the Contract and Commercial Law Act 2017

4 September 2020

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