The purchaser in a sale transaction often does not have full insight into the dealings and risks of the business to be purchased, even when a due diligence has been conducted. The seller, on the other hand, will have more knowledge of the true state of affairs due to their familiarity with – or control of – the business's dealings. The risk is that the seller uses this information asymmetry to overstate certain business assets and, in turn, inflate its value.
One way for a purchaser to mitigate this risk is by requiring that the seller provide certain warranties in the sale agreement. A warranty is a statement made by a party to a contract, to which the maker of the statement binds himself.1 In a sale agreement, it's essentially a ‘promise' by the seller regarding the true state of affairs of the business to be sold. If it is found that the affairs are not as stated in the relevant warranty, the purchaser may bring a claim against the seller for breach of warranty, in other words, a breach of contract.
In the recent decision in Summermania Eleven (Pty) Ltd v Hattingh NO2 the Supreme Court of Appeal (“SCA”) held inter alia, that a breach of warranty must first be proven before a warranty claim can be made. The onus is on the plaintiff to prove a breach of warranty. The plaintiff must prove that (i) the defendant had an obligation, (ii) breached the obligation and (iii) as a result, the plaintiff suffered damages.
The appellant, Summermania Eleven (Pty) Ltd (Summermania), the purchaser, entered into sale agreement with the Hattingh Trust (Trust) for the purchase of a game farm in the Eastern Cape. The purchase price included various species of game on the farm. Clause 5 of the sale agreement stated that:
‘The seller warrants that there will be no material change in the game numbers or game composition on the property as from the date of inspection, being December 2014.'
After taking over the farm, Summermania alleged that the game numbers were significantly less than those stated in an addendum to the sale agreement. On that basis, Summermania claimed the Trust had breached the warranty that it would maintain the numbers and composition of game between the date of the count and the date of transfer to Summermania. The Trust denied this claim.
Sale agreements generally provide for a process to be followed by a party that seeks to bring a warranty claim. The party alleging the warranty breach is required to notify the other party and then prove the existence of the breach. Support for the alleged warranty breach will typically be in the form of evidence provided by a person with the necessary expertise in the subject matter of the warranty. There is no indication that the sale agreement in this case had such a warranty claim process. Instead, Summermania unilaterally enlisted the services of Mr Van Niekerk (“Van Niekerk”), an expert game counter with 15 years' experience in counting game. Van Niekerk conducted an aerial count by helicopter and compiled a report stating that there had indeed been a reduction in the number of game on the farm. The Trust disputed Van Niekerk's findings, resulting in a deadlock. Summermania then approached the High Court.
The trial court, having examined and accepted Van Niekerk's evidence, ruled in favour of Summermania and held that the Trust had breached the warranty. On appeal, the full bench of the High Court reversed the trial court's ruling, reasoning that the trial court had not properly considered Van Niekerk's evidence. It raised concerns about the integrity of the count methodology and the result of the count, both of which Van Niekerk's evidence had failed to address. Furthermore, the report provided no evidence of a factor such as drought, hunting or disease that would have caused a reduction in the composition and numbers of game on the farm between the December 2014 count and the transfer of the farm.
On appeal to the SCA, Summermania contended that the full bench of the High Court erred in placing the onus of proving the probable cause of the alleged reduction on Summermania. The SCA disagreed, reasoning that Summermania, having accepted the accuracy of the initial count, had to show credible and reliable evidence that the numbers had changed. It said it was not sufficient to merely suggest that the game had gone ‘missing' before the transfer. Without any proof of reduction or an explanation for the probable cause of the alleged reduction, the SCA reasoned that the inherent probabilities were that the composition and numbers of game had not changed. Summermania had, therefore, failed to discharge its burden of proof.
What the findings in this case revealed is that in addition to having an expert to prove a warranty breach, the methodology followed by the expert in investigating the alleged breach is just as important. It's not enough that the person making the determination be an expert; their approach must be in line with either the methodology set out in the sale agreement or be within acceptable industry standards. The Trust pointed out the following discrepancies between the methods employed in the count and accepted industry norms:
- The recommended industry practice for an aerial game count is to have two counters sitting behind each other. However, Van Niekerk had conducted the count alone.
- The recommended gridline spacing for aerial counts is 100 metres. However, in this instance a gridline spacing of 300 metres had been used.
- Visual estimations of large herds had been used in the count, instead of the more reliable photograph-and-count method.
Based on these methodology shortcomings, coupled with the fact that Van Niekerk's evidence did not address other aspects of the game count that had been shown to be unreliable, the SCA ruled that Van Niekerk's evidence was not sufficiently reliable. Summermania had, therefore, failed to prove a breach of the warranty.
The important takeaway from this case is that a party alleging a warranty breach must provide sufficient evidence to prove the breach before it can have a claim against the party supposedly in breach. This is in line with the common law principle that ‘he who alleges must prove'. This case further serves as a caution to purchasers to ensure that the expert enlisted for the purpose of proving a warranty breach not only has the necessary expertise, but also conducts the process in a thorough manner that is in line with acceptable industry standards and/or with the standards required and agreed to in the sale agreement. A failure to do so will most likely result in the onus to prove the warranty breach not being discharged.
Footnotes
1. [1957] 1 All ER 325 at 375.
2. [2024] ZASCA 42.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.