Due Diligence Gone Wrong: Environs Wholesale Nursery LTD. v. Environs Landscape Contracting LTD
The appellant accepted a conditional offer to purchase the respondent’s business assets. The offer provided for a due diligence during the which the respondents were entitled to inspect the target assets. The appellants in assisting the respondent with their due diligence process provided a tree inventory to the respondent. This inventory was attached to the Asset Purchase Agreement (“APA”) and noted that there were 236 341 saleable trees on the business property.
On October 5, 2012, the parties agreed to go ahead with the business asset sale. The total purchase price was $5,500,000.
The respondent ceased to pay the second instalment of the $5,000,000 because there were 106 fewer saleable trees than were “represented” in the tree inventory attached to the APA. The respondents claim that the shortfall was a breach of a material representation by the appellants in the APA.
An action was initiated and on February 22, 2018 the motion judge granted summary judgement against the appellants on the issue of liability relating to their breach of contractual warranty and/or negligent representation arising from the tree shortfall.
Motion judge found the appellant liable because the APA contained a representation of the tree inventory. The appellant is now appealing that the motion judge erred in finding that the APA contained a representation of the tree inventory.
Court of Appeal
The Court of Appeal allowed the appeal and concluded the tree inventory was not a contractual representation. The court decided that the motion erred in applying the principles of contractual interpretation to provision in the contract that stipulated that the Purchaser acknowledge and agree that the due diligence process satisfies any concerns relating quantities and qualities of the all plant material. The court contended that the motion judge did not determine what this provision meant in the contract as a whole and assigned it no meaning. The court stated that a judge must interpret the contract as a whole that avoids rendering one or more ineffective.
The court’s principal driver for this legal conclusion was the fact that both the offer and the contract cited that the Purchaser perform a due diligence on the target assets with a consultant. The Purchaser physically inspected the farm with an arborist and closed the deal. The coupling of the due diligence provision and the Purchaser performing due diligence with a professional leaves little room for a claim of misrepresentation as an influencing factor to enter the agreement.
The court also took notice of the respondents’ contradictory arguments. On the one hand the respondents were asking the court to rely on authorities that state the inspection provision in the APA could not be relied upon because it was physically impossible to do a proper inventory of the all the trees. Then on the other hand the respondents offered their own accounting of the trees to support the quantum of damages they are were requesting. The court took notice that they were in fact arguing both ways.
The court found that the motion judge’s finding of fact of the impossibility of offering full inventory was not supported by the evidence. Further the authorities cited in support of this by the respondents were distinguished on the basis that those authorities were referring construction contracts, not purchase and sale agreements.