After the sale of a stallion, what happens to a breeder who has not received the semen or right of free return (live foal guarantee) that the seller had agreed before the sale? If the seller refers the breeder to the new owner and merrily walks away, what is the new owner of the stallion to do?
The seller and breeder have a service agreement, possibly in writing, for the supply of semen and conditions around it. There is a basic legal rule that only parties to a contract are benefited and burdened by it and are entitled to enforce it in case of default. The stallion’s new owner is not a party to the service agreement between the seller and breeder: the agreement might even pre-date the sale by a considerable time. The new owner can reject a claim by the breeder based on the service agreement because the seller’s obligation to supply semen does not bind him or her, a non-party.
If the seller snuck a clause in the sale agreement such as “”the buyer will honour all existing service agreements” would this help the breeder? Unfortunately, the same basic legal rule precludes the breeder from enforcing this clause under the law of contracts because he or she is not a party to the sale of the stallion. The breeder would have to claim against the seller who would in turn have to claim against the new owner. Of course the breeder would have to check any written service agreement for a clause along the lines that the seller is absolved from supplying semen if the stallion sells before semen is requested. There could be other limitations or restrictions on the supply of semen in the service agreement that impact the breeder, so it should be checked carefully.
What can a breeder do upfront to protect the right of supply of semen if the stallion is sold? There are 2 ways, one is practical and the other is legal. Practically, if payment for the semen is made on the day that it is despatched, then there is little to no chance for a sale of the stallion to intervene to frustrate the breeder. But a free return does not usually entail any extra payment and might be exercised the next breeding season or even a later one.
The legal way is to insert a clause in the service contract to create a security interest around the right to breed to the stallion and then to register the security interest under the Personal Property Securities Act 2009. A lawyer would need to be consulted to prepare such a clause and register the interest. If the stallion was subsequently acquired, the new owner’s title would be subject to the breeder’s security interest. The breeder is then in a position to claim and enforce the breeding right against the new owner directly.
In the absence of these protections, one might be forgiven for thinking that the whole mess is the new owner’s fault for not clarifying the number and nature of outstanding service agreements with the seller and verifying the information and going as far as requiring the seller to warrant the accuracy of that information in the agreement for sale of the stallion. In my experience the new owner is too prepared to believe the seller’s assurance that there only a “few breeders” with rights to semen.
If the new owner were to perform due and proper diligence on the outstanding services, then the true state of play would be known and a price adjustment sought to reflect the potential future burden on the new owner. The new owner should ascertain the validity of breeding rights, for instance by the production of the service agreement or details of oral agreements. He or she should ask the seller very specific questions and document the answers in the sale contract and require the seller to warrant the information supplied. A percentage of the asking price might be retained as security for the warranty which might be released within say 6 months or longer on condition that the warranty is un-breached. The time for this risk-related work is in the negotiation to buy the stallion, not after the sale.
If the breeder and the new owner were to observe these prudent practices, there would be far fewer disputes over unfulfilled breeding rights following the sale of a stallion.
13 December 2017
© 2017 Michael Mackinnon, Solicitor & Independent Counsel