PGGW case highlights need for proper due diligence in farm purchases
West coast dairy farmers win battle in court over misrepresentation of production figures.
Philip and Julie Routhan purchased a west coast dairy farm in late 2010 that was advertised by PGG Wrightson to produce on average 103,000 KgMS per year from 260 cows on 105 hectares.
However, following taking possession and despite the best efforts of the Routhans’, they could not get the farm to produce anywhere near this figure, only producing 85,000 KgMS (Milk Solids per Kg) in the 2010/2011 season.
In order to increase production to the advertised levels, the Routhans’ undertook significant capital expenditure including:
- installing a new concrete feed pad ($440,000);
- refencing the entire farm ($250,000);
- replacing and renewing the entire pasture of the farm over 3 years ($150,000);
- applying additional fertilizer that was not budgeted for ($150,000);
- replacing the water system ($116,000);
- installing feed troughs in the cow shed ($8000); and
- resurfacing the laneways and replacing the culverts ($150,000).
In the 2013 season the cows were also milked in the winter which resulted in a shortage of grass in the spring. Consequently, the Routhans’ were forced to reduce from milking twice a day to once a day the following season.
The Routhans’ also tried to cancel the lease of the cows from the previous vendor, thinking that the cows were to blame for the low production. However, this resulted in a contract dispute which an arbitrator did not find in their favour, resulting in the Routhans’ paying damages to the vendor.
It was during this process that it came to the light that the production figures of the previous 3 years were actually:
- 2007/08 – 107,921 KgMS;
- 2008/09 – 97,930 KgMS; and
- 2009/10 – 90,337 KgMS.
Aside from the fact that the average from the figures was actually 98,000 KgMS per year, more crucial to the Routhans’ claim was the steep decline in milk production over these 3 seasons. The Routhans’ claimed that had they known the production history of the farm, this would have led to an inquiry as to why the farm’s production was declining, and not producing a consistent 103,000 KgMS as advertised by PGG.
It was also revealed that the production achieved in the earlier seasons was obtained by excessive application of nitrogen, wintering half the herd off the farm and keeping all heifers off the farm.
The financial position of the farm continued to go backwards as the farm made a loss due to not being able to meet their budget and bank lending requirements. This was exacerbated by the falling price in KgMS.
The Routhans’ made a claim under section 9 of the Fair Trading Act 1986 (FTA). They claimed that the representation as to the average milking production figure of 103,000 KgMS, and the failure to disclose that the vendor had refused to confirm and certify information about the farm including its production figures, constituted misleading conduct. The Routhans’ claimed that but for this representation they would not have purchased the property.
PGG in response pointed to a disclaimer in the Proposal Document, and further stated that the Routhans’ brought their own misfortune upon themselves by being inexperienced farmers, failing to carry out any meaningful due diligence, and failing to cut their losses when it became apparent that the farm could not produce at that level.
PGG also tried to use a limitation defense stating that any claims under the FTA must be made within 3 years of the misrepresentation being made. However, the Routhans’ responded that they were only aware that a misrepresentation had been made in 2014 when production figures were made available after the arbitration with the leasing of the cows occurred.
Justice Dunningham also asked the question whether PGG owed a duty of care to the Routhans’ in tort for negligent misrepresentation considering:
- the proximity of the relationship;
- whether policy reasons exclude the duty;
- whether such a duty is just, fair and reasonable; and
- whether there was specific reliance and loss.
Justice Dunningham had no trouble in satisfying these points and dismissed the defense of the disclaimer noting that it did not apply to information provided negligently by the agent in relation to the average milk production figures.
A significant portion of the judgment focuses on causation and loss due to the misrepresentation. Justice Dunningham applied a test of ‘common sense’ by looking at the default and the extent to which it caused the loss. The judge concluded that the loss is quantified by the losses in committing to the farm purchase, the loss of equity in the forced sale in 2020 to repay creditors, and the loss of the investment in capital developments in the farm. These losses totaled $2,122,000.
This figure was then reduced by 20% for contributory negligence in light of the fact that some of the capital investments had no direct correlation to improving milk production on the farm (e.g. fencing and laneway investments). PGG’s claims that the Routhans’ were negligent in regards to their farming experience, budgeting and failure to carry out proper due diligence were all dismissed. In fact, it actually transpired that in some years the Routhans’ were achieving milk production higher than the average in the region. Total damages awarded were accordingly $1,697,600.
Matters to consider
The case emphasizes the need for purchasers to undertake proper due diligence and verify the veracity of key data such as production values. While they were ultimately successful, the case was a long haul and a disaster they no doubt would have preferred to avoid.
From a vendor and agents’ perspective, the case emphasizes the need to take care with representations made on sale and that a limitation of liability clause is not always going to protect you.
 Invercargill City Council v Southland Indoor Leisure Centre Charitable Trust 2017 NZCA 68.
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This article was included in Edition 5 of our rural newsletter – Rural. which you can read here.