Misrepresenting the Farm

A vendor of a farm property has a legal obligation not to misrepresent to a prospective purchaser the quality or productive capacity of the farm. What is the liability of a vendor who breaches this obligation and what can the purchaser expect to recover?

The British Columbia Court of Appeal recently considered an appeal by a vendor who had induced a purchaser to buy a cattle ranch on the basis of misrepresentations concerning the capacity and water quality of an irrigation well and the profitability of livestock sales and hay production. While the plaintiff purchasers had paid $750,000 for the property, the trial judge awarded damages in excess of $1 million reflecting a difference between the purchase price and the true value of the property as well as out-of- pocket expenses and loss of profits. The defendants appealed.

Although allowing the appeal and reducing the trial judgment to approximately $690,000.00, the appellate court agreed with the principles underlying the trial judge’s damage award. Based on the evidence at trial, the trial judge had concluded that the vendors’ misrepresentations had induced the plaintiffs to purchase the property following which they incurred expenses in excess of $90,000.00 in an unsuccessful attempt to develop other irrigation facilities and grow alternate crops.

The appellate court adopted the reasoning in earlier English cases which have held that: “The defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent inducement. The person who has been defrauded is entitled to say: I would not have entered into this bargain at all but for your representation. Owing to your fraud, I have not only lost all the money I paid you, but what is more, I have been put to a large amount of extra expense as well and suffered this or that extra damages”.

In the result, the court determined that the defrauded purchasers should recover not only the difference between the price paid and the actual value of the property but also most of their out-of-pocket expenses and loss of profit. In this regard, the court stated:

    “In assessing damages for a fraudulently induced purchase of a (theoretically) profit producing property, both the plaintiff’s capital loss and loss of profits are recoverable, the latter as a type of consequential loss …. The trend in Canada and elsewhere is to de-emphasize one particular ‘measure’ or another to strive for an award that in broad and practical terms compensates the plaintiff for all aspects of his or her loss flowing from the fraud … I will therefore proceed on the basis that the plaintiffs here may claim, and the court may award, damages to compensate for loss profits to the extent they are proven to have resulted directly from the defendants’ fraud, and subject to the usual rules of mitigation. The overarching question is what amount of money represents the financial loss suffered by the plaintiff as a direct result of the alteration of his or her position under the inducement of the defendants’ fraudulent representations”.

The trial judge’s award to the purchasers of $500,000.00 for loss of profit was reduced on appeal to $250,000.00 because of the failure of the purchasers to undertake timely mitigation of their damages. The trial judge had expressed the view that “the concept of mitigation is not one to be used to strip recovery away from plaintiffs who have taken the best advice they had available to them and struggled on in the face of gradually emerging facts, in an attempt to mitigate their losses by making the ranch productive”. However, the appellate court held that:

    “ … Care must be taken to differentiate between the date on which the plaintiffs became aware of the full extent of the defendants’ perfidy, and the date on which they became aware they faced serious difficulties in terms of water capacity and quality (giving rise to soil quality problems). In my view, the (purchasers) did not need to be aware of the misrepresentations made to them with respect to calf weights and hay production before they became obligated to mitigate their losses in respect of the water and soil conditions. … In all the circumstances, I am of the view that the plaintiffs were aware of the basic difficulties facing them by the fall of 1997 at the latest, and that accordingly, a duty to mitigate arose at that time. The trial judge characterized (the purchaser) as a person who ‘attempts to carry on’ and sees the good in people and trusts them. As admirable as these traits may be, and as sympathetic as a court might be to the victims of a clear fraud, the law imposes a more objective standard and required reasonable steps to be taken shortly after the fraud had been discovered”.

A farm vendor must ensure that he does not misrepresent what he is selling. Subject to the purchaser’s duty to take reasonable measures to mitigate their loss, breach of this obligation will render the vendor liable to the purchaser for the whole of the purchaser’s financial loss including the excess purchase price, expenses incurred to remedy deficiencies, and lost profits.

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