By Melissa Higham - 24 Feb 2010
Prior negotiations and information exchanges rarely take
precedence in Court over a formal written agreement. If the
agreement fails to accurately record your intention or
understanding of what has been agreed, you proceed at your
peril.
The recent Court of Appeal case - PAE (New Zealand) Limited
v Brosnahan [2009] NZCA - clearly illustrates this point.
Facts of the case
PAE signed an agreement to purchase all the shares in Central
Property Services Limited from Brosnahan and others (the Vendors).
PAE's solicitors prepared the formal agreement. It included clauses
specifying the warranties that the Vendors were making. It also
included an entire agreement clause that superseded all prior
negotiations and representations, and excluded all implied
warranties.
After settlement PAE discovered that the true value of the
shares was $286,000 - not the purchase price of $1,250,000. PAE
sued the Vendors claiming under the Contractual Remedies Act
(reliance on a representation) and the Fair Trading Act (misleading
or deceptive conduct).
PAE's claim dismissed
The Court of Appeal upheld the High Court decision dismissing
PAE's claim. Although the Vendors had made misrepresentations about
the value of the shares and attempted to conceal accounting errors,
it was fair and reasonable for PAE to be bound by the terms of the
agreement because:
• PAE had the chance to complete a due diligence investigation
into the value of the shares
• PAE relied on statements made prior to the agreement being
signed
• The express warranties included in the agreement did not cover
accounts receivable by CPS (which was the largest discrepancy in
the accounts)
• PAE had taken professional financial and legal advice that
suggested including a warranty regarding accounts receivable.
However, PAE chose not to include such a warranty
• To allow a claim under the Contractual Remedies Act or Fair
Trading Act would effectively imply a warranty where the parties
agreed otherwise
• PAE was a subsidiary of a sophisticated, multi national company,
experienced in commercial business. Therefore, no imbalance of
power existed between the parties.
The lesson
This case illustrates the importance of carefully considering
all the circumstances in any commercial transaction. You need to
provide your legal advisors with all the information you have and
take their professional advice. When your formal written agreement
is prepared, it must be tailored to the situation. Otherwise, the
consequences may be serious.
If you require any further information or have any queries,
please contact Melissa Higham.