False Information & Disclaimers for Business Brokers

Do Disclaimers Work?

By giving information to potential buyers of a business, whether verbally or through marketing material, a business broker could be making representations about the business; if the representations have the potential to mislead a buyer, then the broker could be liable.

So can disclaimers help to limit the potential liability of a business broker?  Yes, they can.

Including a disclaimer in marketing material is only one of several factors a court may take into account when considering whether a buyer has been misled.  To appreciate the other factors that need to be considered, it is useful to briefly look at the applicable law, which will usually be the Competition and Consumer Protection Act.

Misrepresentations at Law

The Competition and Consumer Protection Act contains a broad prohibition against misleading and deceptive conduct, which applies to statements or representations about a business made by a business broker to a potential business buyer.

Put simply, it is illegal for a broker to make any claim or statement that is likely to mislead or deceive a potential buyer.  The statement does not have to actually mislead or deceive, nor does it matter whether the broker intended to mislead or deceive a buyer.

Generally, the conduct will be considered likely to mislead or deceive if there is “a real or not remote possibility” that the buyer has been or could be misled.   The court has to inquire into what “a reasonable person in the position of the buyer, taking into account what they knew, would make of the broker’s behaviour”.  Once the reasonable person in the position of the buyer is established, a court will then ask whether such a person would have been misled by the information given by the broker.

This issue is simply a question of fact to be decided on the merits of each case.  As far as business brokers are concerned, the more complicated issue is whether the business broker is responsible for the misrepresentation and, if so, to what extent.

Primary v. Secondary Liability

Where a business broker makes something up or relies on information that they know to be false to mislead a buyer, it is clear that a business broker will be primarily responsible for misleading and deceptive conduct.  But what happens where a business broker has, for example, prepared a brochure about the sale of a business, which uses information sourced from a seller?

In these cases, courts will investigate the role the business broker played in providing the information.  The court basically has to consider: who made the particular representations and would a reasonable person in the position of the buyer consider those statements to be misleading?  In other words, was the agent the originator or just the disseminator of the information?

If the business broker was only a conduit for the information and it is clear (from the buyer’s perspective) that the business broker was not the source of the information and the business broker expressly disclaimed any belief in its truth or falsity, merely passing the information on for what it is worth, then the business broker would be unlikely to be held primarily responsible.  However, the facts are rarely clear.  With representations often coming from sellers and business brokers (individually and jointly), a court might need to consider whether the business broker “made a representation” by adopting as their own the material in the brochure.

A court might also need to consider whether a reasonable person in the position of the buyer, having regard to the nature of the transaction, expertise of the business broker and contents of the brochure, including disclaimers and attribution of information to others, warranted a finding that the buyer would have understood the business broker to be making the relevant representations.  In this regard, a court might examine:

• the expertise of the business broker and the nature of the information in the brochure;
• whether any disclaimers effectively qualified the information;
• whether the business broker adopted or endorsed the information; and
• the buyer’s characteristics and how the buyer understood the information.

Depending on how such questions are answered, it may be the case that the business broker could be primarily liable.  But if the agent is acting professionally, it will be relying on information provided by the seller, so a more likely scenario is that the seller is held principally liable for misrepresentations made in a brochure prepared by an agent.  But in that case, could the agent still be held liable as an accessory of the seller?

Whilst an agent could escape primary liability under the Competition and Consumer Protection Act, the agent could still be caught under the Act for being an accessory to the seller’s primary contravention.  Such secondary or “accessorial” liability applies to a person who has:

• aided, abetted, counseled or procured the primary contravention;
• been directly or indirectly knowingly concerned in, or party to, the contravention;
• induced, whether by threats or promises or otherwise, the contravention; or
• conspired with others to effect the contravention.

Putting aside extreme cases involving threats and conspiracies, what does it mean to aid, abet, counsel or procure?  Basically, by some positive act (in exceptional circumstances silence might be enough) a business broker must instigate, incite, encourage or assist the contravention in some way or render more likely the commission of the contravention.

In some cases, it could just be actual or constructive knowledge of false or misleading information, which might include willfully shutting one’s eyes to the obvious or willfully or recklessly failing to make inquiries that an honest and reasonable person would make.

Whether a business broker is trying to protect themselves from primary liability or liability as an accessory, disclaimers can potentially be effective; but it is important to get them right.

Maximising Disclaimers

The question of whether a business broker engaged in misleading conduct is a question to be assessed by reference to the whole of the circumstances, including the disclaimers in the brochure, the nature of the transaction and the characteristics of the buyer.

A disclaimer will be ineffective in cases where it does not disclaim any belief in the truth or falsity of the information and where the disclaimer does not have the effect of erasing whatever was misleading in the brochure.  For example, it’s no good to have a disclaimer that disclaims all responsibility, but then states that all information “is gathered from sources we believe to be reliable”, which might imply that the business broker has endorsed the information.

The following are some questions that should be considered by business brokers whenever conveying information to a potential buyer of a business:

• Are you aware of the representations carried by the information you convey?
• Are any of those representations contrary to the facts known to you?
• If unsure whether a representation is true, do you have a duty to investigate further?
• Will a disclaimer effectively remove or limit liability if the information proves to be misleading or deceptive?  Is the wording of the qualifier or disclaimer unambiguous?
• Is the disclaimer clearly part of the main body of the information?  Or is clear prominence given to the disclaimer such that it is easily read and understood?

Proceed with Caution

Disclaimers can help, but should only be there as a backup in case things go wrong.  Without simply relying on disclaimers to protect you from liability, a business broker should be aware of the information being presented and the manner in which it is given to a potential buyer.

Unless the business broker knows (as a matter of fact) that the information is true and accurate and is not likely to mislead or deceive a potential buyer, then a business broker should ensure that it is absolutely clear to the buyer that the information is coming from the seller and the business broker is not endorsing the information in any way.

But that’s not enough.  If a business broker has any doubts about the truth or accuracy of the information, they are taking a risk by turning a blind eye and simply relying on disclaimers, as they could still be held liable as an accessory of the seller.

Using disclaimers could mean the difference in avoiding liability, but they should never be relied upon instead of carefully dealing with the information you convey to buyers.

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

Disclaimer

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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