Warranty vs due diligence

by | Apr 3, 2012 | Business Law, General property Law, Sale and Purchase

On 28 March 2007 Mr and Mrs Singh, experienced orchardists, signed up to purchase a lemon and kiwifruit orchard in Glenbrook.  The standard form of agreement for sale and purchase of real estate was used.  A due diligence clause was inserted, giving the purchaser 5 working days to satisfy itself as to a "due diligence verification programme".  This condition was expressed to be for the purchaser’s sole benefit.  The vendor gave various warranties, including an express warranty as to the "approximate" canopy area of older kiwifruit, younger kiwifruit and lemon trees.  Settlement was completed and on discovering a lower production than expected the Singh’s investigated.  They discovered the canopy areas were incorrect.

In the District Court, the Singh’s sought damages for breach of warranty.  Damages were not awarded.  The District Court held that there had been a breach of warranty.  The use of "approximate" did not excuse the shortfall, which was almost 0.9ha across the farm according to the purchaser’s evidence.  However, the Judge said he could not ignore the due diligence clause, which had been inserted into the contract for a reason.  The Singh’s had completed limited due diligence and the Judge considered there had been a clear obligation on them to satisfy themselves that the orchard was acceptable and of sufficient size.  The failure to do so "disentitled" them from claiming compensation for breach of warranty. 

The High Court disagreed with this view.  They found limited support to the proposition that inadequately conducted due diligence prevents a purchaser from suing for breach of warranty.  The purpose of a warranty being sought and given, is for there to be assurance as to the accuracy of the matter warranted.  A warranty is likely to affect the expectations of the purchaser, and may well determine the amount of due diligence completed.  The Judge stated that in general, a warranty given to allay a purchaser’s concerns will not be defeated by inadequately conducted due diligence (although each case will turn on its own facts and the individual contract terms). 

Here the due diligence clause did not impose an absolute obligation on the Singhs to carry out due diligence.  Rather it gave them the right to do so.  The clause was expressly for the Singh’s benefit too, so it could be waived by the Singhs.  It was a general due diligence clause and so the specific (the warranty) overrides this general clause. 

Most due diligence clauses are expressed as giving a purchaser a right to carry out due diligence, rather than obliging a purchaser to do so.  Most are also expressed as being for the purchaser’s benefit.  This was a case about a specific warranty, but in my view this should still be good law for the standard warranties given in the agreement for sale and purchase.  The case is of general interest too for other commercial contracts where warranties and due diligence clauses are included.

By <a href="" target="_self">Denise Marsden</a>

By Denise Marsden