To Exclude Or Not To Exclude Seller’s Misrepresentation In Business Sales – Does It Really Matter?

Most claims against business brokers relate to misrepresentations to buyers concerning the level of income a business will achieve . Also, the majority of reported decisions dealings with representations in sales of business which have been proven to have been erroneous deal with the past profitability of the business.

Exclusions / Limitations of Liability
To protect the parties to a contract from representations (especially wrong ones) that are not expressly included in the contract, contracts will often include the following common exclusions or limitations of liability:

• the agreement for sale contains the entire terms of the parties’ agreement;
• no representation or warranties have been made by or on behalf of the seller other than those incorporated in the agreement for sale;
• the purchaser relied on its own skill, judgement and inquiries (and on the warranties contained in the agreement) in entering into the agreement;
• the purchaser did not rely on any representation or statement made by or on behalf of the vendor, except those contained in the agreement for sale of business.

In Queensland, for example, the REIQ Business Sale Contract includes some of these:

• Buyer’s Statements – cl 8.3(a): The Buyer states and assures the Seller that the Buyer has entered this Contract after satisfactory personal inspection and investigation of the premises, Business, stock-in-trade, licences and other Business Assets and the Buyer has perused such records of financial transactions relating to the Business as the Buyer has desired to inspect.
• Entire Agreement – cl 39.1: This contract contains the entire agreement between the parties with respect to its subject matter and supersedes all prior negotiations, understanding and agreement whether written or oral”
• Errors and Misdescriptions – cl 10.1: If any mistake is made in the description of the Business or the Business Assets or the premises or any other error whatsoever appears in any schedule, annexure or appendix to this Contract such mistake or error does not annul the sale but compensation or equivalent must be given or taken as the case may require.

Depending on the misrepresentation made, these standard conditions may defeat a claim; especially if the buyer satisfactorily verified the books and records of the business under cl 37.

For misrepresentation to apply, a buyer would normally need to establish the following :

• that a false statement was made;
• that the statement was one of fact;
• that it was addressed to the party misled (before or at the time the contract was made); and
• that it was intended to induce and did actually induce the contract.

Given the element of inducement, the clauses outlined above may evidence that the buyer did not rely on the representation in question and therefore was not induced.

“No Reliance” Clauses

In addition to these standard conditions, it is not unusual to find a special condition inserted into a business sale contract along the lines of this one from the case of Petera Pty Ltd v EAJ Pty Ltd (1985) ATPR 40-605:

“The Purchasers acknowledge that they have, in entering into this agreement, not relied upon any statement, representation, warranty or condition made or given by the Vendors or anyone on their behalf in respect of the subject matter of the this agreement, other than those that are expressly herein contained”

Again, such a clause is likely to defeat a claim for misrepresentation.

However, Wilcox J pointed out in that case (at 46,887):

“Whatever may be the effect of cl.19 in relation to an action brought in contract, in which reliance is placed upon an alleged warranty or condition not included in the contract of sale, that clause should not be allowed to defeat a claim based on sec. 52.

Sec. 52 being a reference to the former Consumer Protection Law, the Trade Practices Act.

Application of Consumer Protection Law – Misleading & Deceptive Conduct

A misrepresentation, even if disclaimed under contract law, can still fall short of the misleading and deceptive conduct provision of the Competition and Consumer Protection Act 2012 (Cth) or the equivalent in each State.

Section 18(1) of the CCPA reads:

A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

“Misleading or deceptive” in the context of s 18 means simply that the conduct of the seller was capable of leading a buyer into error (per Gibbs CJ in Parkdale Customer Build Furniture Pty Ltd v Puxu Pty Ltd at 198).

Also relevant:

• 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), including “the experienced as well as the inexperienced, and the gullible as well as the astute” (per Gibbs CJ in Parkdale Customer Build Furniture Pty Ltd v Puxu Pty Ltd at 199).
• Intention to mislead or deceive (or lack of it) makes no difference (per Gibbs CJ at 197).
• 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 buyer during business sale negotiations, if the conduct of the business seller 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 (Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) 72 ALR 601);
  • failure by a business broker to disclose that the business could not be conducted lawfully at the business premises (GA Nominees Pty Ltd v Bardon Motors Pty Ltd (1984) ATPR 40-519).

What to do?

It is important that a seller be aware of the application of the CCPA and that it will trump any contract terms in the contract. It is importance to only state the facts and if ever in doubt, find out.

Author

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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