A Jolt For The Thoroughbred Industry

Mar 21, 2012

Kindly reproduced with the permission of Brian Russell Media

A Law Report by George Fraser

Vieira v O’Shea, a Jolt for the

Thoroughbred Industry

The New South Wales Court of Appeal handed down judgment in Vieira v O’Shea on 5 March 2012. The case was an appeal from the decision of the District Court relating to the purchase of a yearling at the Magic Millions sale in January 2007. The decision of the Court of Appeal has left participants in the wider thoroughbred industry wondering just where they stand.

The important thing to note is that the decision of the Court is not a novel interpretation of the law as far as contractual liability is concerned. It was the application of the law to what is usually a fairly informal agreement between a trainer and a prospective purchaser. In fairness, this type of case rarely comes before the court, which we assume is more from a prevalent industry attitude of ‘win some, lose some’, rather than the novelty of Mr Vieira’s claim.

Background

Humberto Vieira was introduced to John O’Shea in January 2006 through former bloodstock insurer Barry Burke. At that time Mr Vieira was a newcomer to the world of thoroughbred ownership. He soon remedied that situation with the purchase of six yearlings at that year’s Magic Millions, including a half share in 2007 Magic Millions hopeful, and subsequent stakes winner, Espurante.

Mr Vieira returned to the Magic Millions sales in 2007 and spent up again, purchasing a 70% interest in the Dehere yearling colt soon to be known as ‘Dashere’. Dashere was bought by John O’Shea , with whom Mr Vieira by now had a successful racing relationship. Mr Vieira had sent John O’Shea to the sale with the brief to buy him a horse with no issues or problems, not a risky one, suitable to be trained as a stallion. This conversation took place prior to John O’Shea purchasing the horse.

The evidence shows that John O’Shea was careful and methodical in his yearling pre-purchase checks. Not only did he inspect the prospective purchases himself, he had them inspected by Randwick Equine Centre veterinarians, and had their x-rays inspected. There was no judicial criticism of John O’Shea’s methods of pre-purchase due diligence.

In the case of Dashere, the horse was presumably inspected by John O’Shea, and was then checked for conformational faults by Dr Humberstone of Randwick Equine Centre. Having passed the visual checks, Dr Humberstone then examined the x-rays provided for the purpose of selling the horse, and presumably lodged at the x-ray repository at Magic Millions. The x-rays may have shown other items, but the telling item was a pre-cystic lucency in the left stifle. D Humberstone identified this lucency and reported it to Mr O’Shea, and that the horse had had a stifle injected, and identified the lucency as being “low risk with time 6 months”.

Mr O’Shea then held a conversation with Mr Vieira in which Mr Vieira asked if everything was OK with the horse, and if the vet said the horse was OK. Mr O’Shea advised Mr Vieira that “There is nothing wrong with him. The horse is good.” Mr O’Shea admitted in cross examination that he knew the horse had issues, and was not free from issues.

Dashere went on to a career marred by surgery and eventually ended up winning a race at Quambone.

The District Court Proceedings

Mr Vieira, presumably less than pleased with his purchase commenced proceedings in the District Court alleging negligence on the part of John O’Shea, misleading and deceptive conduct under the Fair Trading Act 1987 (NSW), breach of fiduciary duty, and breach of contract. Judge Rolfe in the District Court proceedings dismissed Mr Vieira’s claim against John O’Shea, but went on to assess damages in case he was wrong on the question of liability.

Mr Vieira appealed this decision to the Court of Appeal, where the only grounds of appeal ultimately pursued was for breach of contract.

By agreeing to conduct pre-purchase inspections of horses that Mr Vieira may ultimately purchase, Mr O’Shea entered into a contract with Mr Vieira. John O’Shea would receive $1000 for the costs of inspecting any horse subsequently purchased. Mr Vieira had set a term of the contract when he said to John O’Shea that he wanted a horse free from issues, not a risky one. The evidence was that Dr Humberstone had advised Mr O’Shea that there was an issue with the horse’s x-rays and that he had had a stifle injected, but that the horse was low risk, with time, 6 months. The evidence showed that Mr O’Shea was familiar with the term “with time 6 months” that it meant the horse should not be broken in or ridden for six months, and thereafter should be a low risk horse.

The contractual dispute in the District Court ultimately turned on “whether, pursuant to their agreement, the appellant (Vieira) had accepted that Mr O'Shea would obtain veterinary advice (which he admitted he was not competent to assess) and, by reference to the criterion described to the appellant, determine whether the horse was able to be the subject of a purchase recommendation, or whether Mr O'Shea could recommend a horse for purchase, notwithstanding that it did not satisfy that criterion, without informing the appellant of any particular issue in respect of the horse which Mr O'Shea was minded to disregard” (Vieira v O’Shea at [20])

In plain english, the dispute in the District Court was whether:

1. Vieira had accepted that O’Shea would obtain veterinary advice and make a decision if the horse fit the purchase requirements of Vieira;

OR

2. Mr O’Shea was permitted to purchase the horse even though it did not meet Vieira’s requirements, on the basis that Mr O’Shea thought the horse’s x-ray issues were not enough to prevent the purchase.

Judge Rolfe in the District Court trial found that the agreement between Mr Vieira and Mr O’Shea fell into the second category, on the basis that Mr Vieira was not interested in the steps Mr O’Shea took in arriving at a purchase recommendation. Accordingly Judge Rolfe found for Mr O’Shea.

The Court of Appeal Proceedings

On appeal, the Court of Appeal found that the basis of the contractual arrangement between Mr Vieira and Mr O’Shea was that Mr O’Shea “would not recommend for purchase any horse which was not "free of any veterinary problems which will inhibit its capacity to race" and not "free of any issues" (Vieira v O’Shea at [28]) This is a significantly different basis for the agreement to that as was found by the District Court Judge.

The Judges in the Court of Appeal rejected the District Court Judge’s formulation of the contract on four grounds:

1. “Mr O'Shea stated he would not recommend for purchase any horse which was not "free of any veterinary problems which will inhibit its capacity to race" and not "free of any issues". (Vieira v O’Shea at [28])

2. “It may be true that no horse is risk free, but it does not follow that all horses classified as "low risk" are free of any veterinary problems which would inhibit their capacity to race. Dashere, in particular, was not such a horse. Nor was his category merely "low risk": it was low risk with time, six months. According to the finding made by the primary judge at [106], Mr O'Shea knew that that classification meant that the horse could not be broken in nor given any ridden exercise for the nominated period. There was no suggestion that a six month period was so brief as to be insignificant in terms of capacity to race (which was thereby postponed). Nor could it be said that the horse was free of any relevant veterinary problems, or "free of any issues" in more colloquial language” (Vieira v O’Shea at [30])

3. “The proper inference to be drawn from this material was that the contractual arrangement did not extend to a recommendation for purchase in respect of Dashere.” (Vieira v O’Shea at [31])

4. “ [I]t follows that the recommendation to purchase constituted a breach of contract.” (Vieira v O’Shea at [32])

In the circumstances Mr O’Shea was found liable because he had breached his contract with Mr Vieira, because pursuant to the terms of the contract, it was not possible for Mr O’Shea to make a purchase recommendation for the horse Dashere, without being in breach of his agreement.

Damages

In assessing damages for the breach of contract the Court looked at the circumstances where the horse underwent surgery in July 2007, and Mr Vieira apparently became aware of the issue with the stifle. The court found that following surgery, Mr Vieira was effectively “locked in” to the horse until it was subsequently sold in March 2009 for $20,000. Because of that circumstance, Mr Vieira was relieved of the usual duty to mitigate his loss, and was awarded damages for his losses up to March 2009.

Ordinarily, it is the duty of a party who has suffered damage or loss to take steps to limit that loss. In the case of a non-functional horse, it ought to be either sold or destroyed. The court will generally not look benevolently on a person who has not taken steps to stop ongoing losses where it is in their power to do so. In this case, the Court did approach the question of damages from the point of view of the ordinary process for calculating damages for misleading and deceptive conduct, and applying it to calculation of damages for breach of contract, but that will interest legal scholars in the main, and persons who otherwise suffer from insomnia.

The Consequences

This case, while shocking to the wider thoroughbred industry is not a novel case.

Mr O’Shea made an agreement with Mr Vieira, which Mr O’Shea broke.

Mr O’Shea was not found to be negligent, or dishonest, or in breach of his duty to Mr Vieira as an agent. There was no adverse finding against Mr O’Shea on any of these grounds either in the District Court presumably, or the Court of Appeal. The evidence showed that Mr O’Shea employed a rigorous yearling selection process, based on his own hard work, and on veterinary advice. However in this instance, he told Mr Vieira that he would recommend only a very specific category of horse for Mr Vieira to purchase, and breached his promise, by recommending a horse to Mr Vieira that was not what he had promised to recommend.

For Trainers and Agents

Trainers, agents and anyone inspecting horses that will be bought by others on their recommendation ought to especially careful to comply with any directions given to them by the buyer, as to what they specifically wish to purchase. To this end it is suggested that written instructions be taken and kept on file. Specific instructions ought to be taken as to whether the agent is empowered to use their own judgment in purchasing a horse, or whether a veterinary examination is required proper to purchase.

If a veterinary examination is required prior to purchase it should be specifically noted whether a written report is to be provided to the agent and/or the buyer. We suggest that in all instances a written report should be prepared, and forwarded on to the prospective buyer with the disclaimer that the buyer is obliged to seek their own advice on any possible clinical significance of findings. The buyer should be directed to obtain a second opinion, or otherwise waive that right and proceed regardless. Any waiver should be obtained in writing.

While it was not a feature of Mr O’Shea’s case, it ought to be pointed out that an agent has a duty to put all relevant information before their principal in relation to a horse it is proposed to purchase. Therefore, any vet reports, or even representations made by stud staff should be carefully noted and passed on to the principal.

For Studs

It is strongly suggested that studs ought to be extremely careful when discussing a yearling’s x-ray results with potential buyers. It is not uncommon for a looker to ask the stud-hand holding the yearling if there are x-rays and if those x-rays are clear. The looker should on all occasions be directed to have their vet examine the x-rays in the repository and form their own opinion.

If a staff member of the stud gives any advice on the findings on x-rays, the stud is vicariously liable for the act of its employee, and may end up as a defendant in a claim for negligent misrepresentation or misleading and deceptive conduct.

A stud ought to be careful when using x-rays as a part of the process of determining reserve prices when selling as agent. A consigning vendor ought to be fully advised as to any x-ray pathology revealed and the possible effect on the selling price of the yearling. It would be a dangerous area for a stud to find itself, if an unrealistic reserve was recommended.

For Veterinarians

Veterinarians are one of the few professions that seem, by and large, to avoid the steely gaze of the lawyer. We doubt this state of affairs will continue forever.

Veterinarians must be careful to note all findings on examination of x-rays whether those findings have clinical significance or not. Whether a veterinarian expresses an opinion as to the likely severity of a finding is a matter for the veterinarian. If an opinion is expressed, it should be done in specific terms as to the likely effect to finding may have on future performance.

Veterinarians ought to keep in mind that not only are they liable in negligence and in contract to the person paying them to provide the report, they may also be liable in negligence for a subsequent person who comes into possession of the report and relies on its contents to their detriment.

To this end, the x-ray report made at or for the sale, may come back to haunt a vet in the future, and in the hands of a new owner.

For Sales Companies

A sales company will generally have the same concerns as an agent, particularly when acting for a purchaser. Again, specific instructions should be sought from a principal, and meticulous records kept of any advice given.

Conclusion

While we would, as an industry, prefer to see no more of these types of matter come before the courts, no doubt there will be others in the future. It is heartening to note that no finding of negligence, or dishonesty was made against Mr O’Shea. His conduct was otherwise acceptable, save for the specific instance where he promised to recommend a specific category of horse to Mr Vieira for purchase, and failed to deliver on that promise. Given the wide ranging allegations made against Mr O’Shea in the District Court proceedings it is a very narrow ground on which Mr Vieira had his success in the Court of Appeal. Industry participants will need to be on their guard against possible future claims, but the usual attention to instructions and proper record keeping ought to provide a good general level of protection to the honest dealer.

George Fraser is a practising solicitor with Equilaw Solicitors at Muswellbrook, and is a co-owner of Ilala Stud at Scone. See www.equilaw.com.au and www.ilalastud.com

THIS REPORT TRANSMITTED BY BRIAN RUSSELL BLOODSTOCK MEDIA SERVICE,

PUBLISHER OF THE AUSTRALIAN THOROUGHBRED MARCH 19, 2012

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