Day At The Track

No bidding until you do all your homework

07:14 AM 02 Jul 2013 NZST
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If you decide to drop a claim slip in with the judges, it's fair to say that you've done all your homework first. You've looked at pedigree; studied past performances; watched how the horse makes it around the oval for several weeks and generally have the feel that you can get him to be competitive in a higher class in rapid fashion.

Short of engaging in espionage at the place where he's stabled, however, there's not much else you can do. You see some significant gaps in his racing lines. Were they just freshening periods, or was there something amiss with his health that might prove to be chronic? He seemed off in his gait during his warm-up. Is it poor shoeing or an injury? Truth is, unless you want to approach his connections privately to negotiate a sale, you're simply not going to be allowed to perform a pre-race veterinary check, look at radiographs or get his recent vet bills.

In the general investment sphere, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party. The process serves to confirm all material facts in regards to a sale. In the claiming realm, the diligence you are able to exercise is limited by the rules of the game. So, you do the best you can and hope for the best.

Auctions, on the other hand, afford potential purchasers a quite expansive opportunity to investigate prior to sale. Unfortunately, when opportunity knocks, some folks simply forget to answer the door.

A lawsuit raging in the Kentucky courts provides a good lesson in why exercising due diligence is so critical. A major Thoroughbred auction house put a pregnant broodmare through its sales ring. The winning bid was a whopping $2.1 million. Soon after, the mare seemed uncomfortable, and it didn't take long for the purchasers to discover that their new acquisition might be suffering from a chronic case of potentially deadly laminitis. Further, it appeared that the horse had received significant levels of Phenylbutazone or "Bute", a non-steroidal anti-inflammatory drug that they now alleged was used to intentionally mask the manifestations of the underlying disease. The purchasers are suing to have the sale rescinded. Simply put, they want their money back and they don't want the mare.

Of course, the sellers' veterinarian has declared the mare perfectly sound, and the auction house denies all liability. Who wins? For our purposes, the better question is "Who cares?" Whether ultimately victorious or not, nobody wants to be in the purchasers' situation.

Going to auction to buy a horse? Here are some things that you should be aware of before you even get there.

First and foremost, the terms of sale contained in the front of the auction catalogue should be read, re-read and then read again.

The auction company serves as an intermediary between the seller or seller's consignor and the potential purchasers, and sets strict rules which must be adhered to in order participate. Generally, there are no warranties, express or implied, regarding the horse's soundness or fitness for a particular purpose. In fact, many sales terms do not require the disclosure of prior surgeries. In effect, all you get at the sale is a guarantee regarding the horse's breed and ownership; checking the rest is up to you.

Some sales catalogues grant the winning bidder limited warranties, such as freedom from fractures ("bone" warranty) or that the horse is not a cribber. Every catalogue, however, requires the successful bidder to invoke a limited warranty, meaning the filing of a notice of rejection indicating that one of the few warranties has been breached and they want to give the horse back and have their money returned, before the horse leaves the sales grounds, or quite shortly thereafter. Horses' conditions change on a daily basis. Moreover, it is commercially prudent to set forth standards by which sales are deemed final and irrevocable. Once the hammer comes down, the winning bidder must continue to exercise due diligence, and do it quickly. Lining up a vet exam within hours of the auction is necessary.

Of course, checking out the horse's physical condition should occur before the bidding begins. Amazingly, in the Kentucky case, the purchasers reportedly never undertook the conduct of a veterinary examination before the mare entered the sales ring. Whether filled with Bute or not, there was at least the possibility that a once-over by a competent vet would have disclosed something wasn't right with the horse, even if laminitis wasn't initially identified as a prime suspect.

Because of this glaring lack of due diligence on the part of folks who spent over $2,000,000 for the mare, they have an uphill battle in court. Consider that of the several causes of action alleged, they are claiming fraud, fraudulent misrepresentation and fraudulent concealment. Yet, if purchasers failed to avail themselves of the clear opportunity to check things out for themselves, they have only themselves to blame. Assuming for the sake of argument sellers did, in fact, conceal a condition and make misrepresentations about the horse's health, the fact that purchasers failed to take the reasonably prudent step of performing just a cursory investigation before bidding is going to present a huge hurdle in the lawsuit.

Diligence also extends to the sales ring itself. Virtually all printed terms of sale indicate that notifications from the auction stand trump the written terms. A common example would be when the auctioneer states that the horse entering the sales ring is a cribber. By making this statement, the auction company is negating the limited warranty normally permitting rejection of the horse as being a cribber. Again, it's important that as you're looking at the hip number in the ring, you are also listening to what is being said over the loudspeaker.

Finally, while not technically part of the due diligence regimen, making arrangements for the placement of insurance when the hammer drops is certainly more than prudent. Pursuant to most terms of sale, risk of loss transfers to purchaser upon fall of the hammer, even if the horse remains on the sales grounds for a period after the sale. If not a full mortality policy, the purchaser should at least make sure that a limited peril policy such as "fire, lightning and transport" (FLT) be in place at the moment of purchase. If the purchase price of the horse is minimal, and doesn't justify an insurance premium payment, then the decision to "self insure" has been made. Prudence, however, would dictate that any money expended above a nominal sum should be protected in the event of a catastrophic loss at the time of sale and beyond.

Everybody who bids at an auction is looking for quality for a bargain. The fact that a horse never lives up to its pedigree, or has nice conformation but not much else, is a fact you just have to live with. Buying a horse that's sick, sore or injured is for the most part preventable, if you take the sensible steps that are afforded to you. Knowledge of the rules provides a guidepost for what you get yourself into by bidding, what you can't get out of, and how to avoid a bad result. The remorseful buyer usually has the person in the mirror to blame. The more diligence exercised, the less buyer's remorse is experienced.

Chris E. Wittstruck is an attorney, a director of the Standardbred Owners Association of New York and a charter member of the Albany Law School Racing and Gaming Law Network.

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