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Playing it Safe in Commercial Transactions

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 It also included an entire agreement clause that superseded all prior negotiations and representations, and excluded all implied warranties.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.


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