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Case law shaping the scope of warranty protection

There were a couple of cases in 2021 which buyers should pay attention to. Buyers of a business will obtain warranties from the seller about the state of the business and assets being sold. If the warranties are breached, the buyer may be able to make a warranty claim against the seller. These recent cases provide a warning about the scope of protection such warranties actually provide to a buyer.

In Williams v Tellens Systems NZ (2013) Limited [2021] NZHC 1199 (Tellens), the High Court examined (again) the knowledge requirements for giving a warranty.

Tellens held that the duty to disclose under a warranty only exists where there is knowledge of that which should be disclosed.

Tellens involved a sale of shares in a company. The sale and purchase agreement included a standard warranty that, “the seller has disclosed to the buyer in writing all material matters and all material contracts”. It turned out that the company had missed GST payments and was balance sheet insolvent at the time of the sale. The buyer brought a claim for a breach of the warranty. The seller’s defence was that he did not know that the company was balance sheet insolvent so was not required to disclose the fact.

In interpreting the warranty, the High Court applied a previous case (Tasman Liquor Company Limited v Nine Paddocks Limited [2009] NZCA 593 (Tasman)) and said that the seller “would not be in breach of warranty for failing to disclose something he did not know” and that the duty to disclose under a warranty only exists where there is “knowledge of that which should be disclosed”.

In both Tellens and Tasman, neither warranty provision explicitly detailed what level of knowledge was required. However, both agreements had other warranties with language that limited the warranty “to the seller’s knowledge”. The inference is that even when faced with active limitations in other provisions, the court may read in a requirement that the warrantor can only be liable for failing to disclose things they actually know.

Given a function of warranties is to allocate the risk of the unknown as between the buyer and seller, how can the buyer effectively allocate that risk to the seller should they wish to do so?

Two potential solutions are:

  • obtain an indemnity from the seller where they agree to meet any liability and costs arising from the undisclosed matter; and/or
  • be specific in the warranty about the level of knowledge required – e.g. the knowledge of a reasonably experienced person in the position of the seller, having made due inquiry.

In Lendlease Capital Services Pty Limited v Arena Living Holdings Limited [2021] NZCA 386 (Lendlease), the Court of Appeal clarified the requirements for a valid notice for a breach of warranty claim.

Lendlease held that warranty claim notices must provide clear and specific details of the relevant warranties that have been breached.

In Lendlease, the seller of five retirement villages provided warranties to the purchaser including a “Maintenance Warranty” and a “Watertightness Warranty”. The terms of the agreement required any notice of a warranty claim to be in writing and to set out “reasonable particulars of the grounds on which [the claim] is based”. It also needed be issued by a certain date.

When the purchaser became aware of “significant and systematic watertightness issues”, it issued notice under the Watertightness Warranty specifically and “likely other Warranties”. The key question on appeal was whether this inclusion met the notice requirements, judged by whether a reasonable recipient, knowing the terms of the agreement, would have understood the notice to raise a claim under the Maintenance Warranty.

The Court of Appeal held that including “likely other Warranties” was not enough to constitute notice under the Maintenance Warranty and that the purchaser was out of time to claim when the appropriate notice was eventually issued. The inclusion of “likely other warranties” was insufficient because the grounds for a breach were not expressly identified. Plus, the use of the word “likely” indicated a future claim, not notification of a current claim.

The learnings from this case around warranty claim notices are:

  • Use definitive and active language;
  • Give details of the type of the warranty being claimed under;
  • Give details of the nature of the breach of the warranty; and
  • The more specific the warranty, the more specific the notice needs to be.

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