2010 ushered in substantial changes to Australia’s consumer protection laws. Whilst much has changed, including the name of the Trade Practices Act (TPA) to the Competition and Consumer Protection Act (CCPA), much has stayed the same. The provisions most relevant to business brokers, those relating to deceptive and misleading conduct, are substantially the same. Therefore, the existing theory and practice on the subject remains relevant and good practices of the past will see you through the change in regime.
It is important to note that the new regime, an initiative of the Council of Australian Governments (COAG), results in a single national consumer protection law throughout our States and Territories. Therefore, business brokers will be no longer concerned with the application of the TPA on a national level and the Fair Trading Acts of the State.
The two important provisions
The previous section 52(1) of the TPA is now section 18(1) of the CCPA and reads:
A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
The previous section 51A(1) of the TPA is now section 4(1) of the CCPA and reads as follows:
If a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act); and the person does not have reasonable grounds for making the representation; the representation is taken, for the purposes of this Schedule, to be misleading.
Misleading and Deceptive Conduct
What does it mean? To put it simply, a business broker must not lie or give the wrong impression to a prospective buyer or anyone else.
Remember, with misleading and deceptive conduct:
- if it is likely to mislead or deceive, that is sufficient; the conduct does not have to actually mislead and deceive.
- it is an objective test and would apply to a recipient of the conduct (e.g. a business buyer), who “may not be particularly intelligent or well informed, but perhaps somewhat less than average intelligence and background knowledge, but not a person who is quite unusually stupid.”
- intention to mislead or deceive (or lack of it) makes no difference.
- includes silence if such silence is likely to mislead. Whilst no requirement exists for a blanket disclosure of all information that may influence the mind of a business buyer during business sale negotiations, if the conduct of the business broker is such as to create an impression that a certain matter does exist, or that there is nothing unusual in the transaction, then disclosure may be necessary to ensure the conduct is not misleading. Examples:
- failure by a business broker to disclose that the legally permissible seating capacity of a restaurant was less than the actual seating capacity as represented;
- failure by a business broker to disclose that the business could not be conducted lawfully at the business premises.
- includes statements of opinion that imply false representation of fact or are not reasonably held. Examples:
- stating there will be a high level of franchisor support and advertising campaign for a franchisee business when there were no arrangements or budgets in place by the franchisor for national advertising.
- stating there is a high level of demand for the business’s services or products when not in possession of any market research demonstrating this extensive demand;
- statements thought to be puffery may be representations. Puffery is a term used to describe wildly exaggerated, fanciful or vague claims for a product or service that nobody could possibly treat seriously, and that nobody could reasonably be misled by. Examples of puffery include ‘best coffee in town’ or ‘freshest taste ever’. Puffery in advertising is a practice that is generally not prohibited by the consumer protection laws. The more general the words the more likely they are to be regarded as puffery. Some sales pitching and mere puffery are acceptable and expected by business buyers, who would place little reliance upon the information, but where the information is important detail which the buyer might well think is a considered statement, the statement may shift from mere puffery to a representation.
Misleading Representations Regarding Future Matters
The new section 4(1) of the CCPA is substantially the same as the previous section 51A of the TPA (though other sub-sections have been redrafted to remove a number of ambiguities resulting from the interpretation of the previous provision).
Importanty, a representation by a business broker will be taken to be misleading if the business broker had no reasonable grounds for making the representation. It does not matter if the representation, at some point in the future, is proven true.
- stating an expectation of high profitability for the business when there is no reliable basis for the sales data and financial models;
- stating a business had so many bookings for the upcoming months that one of the buyers would have to give up their job to work in the business with the other buyer when it did not.
Answering Prospective Buyer’s Questions
With the application of the CCPA in mind, how should a business broker answer a prospective buyer’s queries concerning a listed business? If a business broker is asked a specific question concerning a business by a potential buyer, the business broker should carefully consider the answer, or, if the answer is not definitively known, should obtain written instructions from the business owner (if they are likely to know) or suggest that the buyer make their own investigations or obtain further specialist advice.
If the business broker feels they must answer a question on the spot and is unsure of the factual position, the buyer should be informed that the information may not be correct and that the buyer should undertake a separate enquiry.
The business broker should be particularly careful if they are aware that the answer may be relied upon by the buyer in determining whether or not to purchase the business.
Presenting Information to Prospective Buyers
Business brokers often feel that if they relay or “parrot” the information provided by the business owner, they are safe. This is not the case. If such information is misleading and deceptive, then the business broker is likely to be roped or implicated in any subsequent legal action initiated by a disgruntled buyer and is likely to be found liable.
This is especially so if the agent is a specialist business broker who helps to put the marketing material together, possesses business and research skills and assists in setting the price. In effect, the business broker is a consultant.
A prudent business broker will cautiously check any particular information given by a seller in relation to at least the key aspects of the business being sold.
This standard is made law in the Property Agents and Motor Dealers (Commercial Agency Practice Code of Conduct) Regulation 2001, which provides that a commercial agent:
- must exercise reasonable skill, care and diligence in the conduct of a commercial agency practice – Rule 8(1).
- must take reasonable steps to find out or verify the facts material to the activity that a prudent commercial agent would have found out or verified to avoid error, omission, exaggeration or misrepresentation – Rule 20.
Further, clause 7.2 of the PAMD 21a (Appointment of Agent) provides an authority to the business broker to take reasonable steps to find out and verify the facts material to the sale or exchange that a prudent agent would find out or verify in order to avoid error, omission, exaggeration or misrepresentation. Anything less than this falls short of the business broker’s obligations under CCPA and their professional obligation to their client.
It is not possible to rely on an exclusion clause in marketing material to avoid the operation of these provisions. However, it is still good practice for a business broker to have properly drafted exclusion clauses in their brochures as it may be of assistance in relation to claims for breach of contract or negligence. It is important that any prospective buyers are directed to the disclaimer (where possible) and given the opportunity to read and appreciate the effect of the disclaimer prior to signing.
To reduce the risk of making misleading and deceptive statements, business brokers should:
1. conduct their own due diligence about such things as the business’s:
- financial viability and return on investment;
- employees & contractors;
- customer relationships/contracts;
- supplier relationship/contracts;
- security of tenure.
2. ensure that market research or other documentation exists to support the representations being made;
3. avoid “parroting” the words of the seller unless they have reasonable grounds for believing the accuracy of the representations made;
4. only make statements that the business owner would be prepared to put in writing;
5. seek legal/accounting advice if necessary to satisfy themselves that the representations would not be likely to be construed as misleading or deceptive.
6. search of the court records to check the litigation history of the seller (visit www.courts.qld.gov.au/esearching/party.asp for Queensland);
7. conduct a company search through ASIC on the seller (if company) (contact CITEC or ESS); and
8. search ACCC records to determine whether the seller is, or has been, under investigation (public registers – www.accc.gov.au/content/index.phtml/itemId/3673 ).
Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers
The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.
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