Fake News: False, Misleading or Deceptive Statements in Business Sales

201902.20

The making of inaccurate, misleading or deceptive statements or representations by vendors (and their agents) in the context of business sale transactions can give rise to different rights and remedies for aggrieved purchasers under legislation and the common law.

Whilst the cause of action relied upon by a disgruntled purchaser will depend upon a range of factors – including the value of the business, the timing of the breach, and the remedy sought – claims will typically be made under one or more of the following heads:-


  • the Misleading or Deceptive Conduct provisions of the Australian Consumer Law (ACL);

  • a claim under section 52 of the Estate Agents Act 1980 (Vic) (EAA); and/or

  • a (contractual) breach of warranty claim.


1. Misleading or Deceptive Conduct Claims under the ACL

Under s 18 of the ACL a person engaged in trade or commerce may find themselves liable for conduct or representations where:


  • the conduct or representation is misleading or deceptive, or likely to mislead or deceive; and

  • reliance upon the conduct or representation causes another person to suffer loss or damage.

The concepts of misleading or deceptive conduct have been taken at face value by the courts. Whist ‘deceptive’ requires an intention to deceive (e.g. fraud), ‘misleading’ does not require any intention or particular state of mind to be established. This imposes a strict liability test where one party leads another into error in commercial or consumer dealings – meaning, for example, that a person may be liable for losses caused by his or her statements which that person believed (incorrectly) to be true or accurate.



(a) Express and Implied Representations and Silence

This issue is most likely to arise where you have an over-enthusiastic vendor (or broker) who misrepresents a business’ trading figures or projections. If those statements or information subsequently turn out to be incorrect, and they were relied on by a purchaser, then a claim for loss and damage could well arise.

Whilst express representations (such as factually incorrect statements in the course of negotiations) are the most straightforward form of conduct caught under the ACL, in some cases a party’s silence on a particular issue may also create grounds for a claim.

The courts have consistently stated that context is critical to establishing a claim. For example, implied representations may arise out of the context of the particular relationship between the parties, and the history of dealings between them, so that the entirety of conduct throughout the course of a transaction is open to scrutiny.



(b) Insufficient Disclosure of Information

Conduct may be misleading or deceptive even in the absence of any direct representations about a particular inquiry. When a vendor is made aware of the fact that a potential buyer intends to purchase the business for a particular purpose to which it is unsuitable, failing to disclose this unsuitability, or a partial disclosure that does not directly address the issue of suitability, may be in breach of s 18 of the ACL.

For example, a potential purchaser of a technology retail business intends to expand the inventory of the store to include products from a particular manufacturer, however, the vendor knows that this manufacturer already has an exclusive distribution agreement for the area with a competing business. If the purchaser merely expresses this intention without making direct enquiries about the possibility of stocking the products, the vendor may be in breach by simply choosing not to inform the purchaser about the competitor.

Alternatively, if the purchaser were to make direct enquiries as to whether the products could be stocked, a vendor could breach s 18 by responding to the effect that it simply chose to stock other products because they were of better quality, for example.



(c) Subsequently Incorrect Statements

Sometimes the circumstances of negotiations change, such that honest representations made during early stages of dealings are rendered misleading or deceptive by subsequent events.
For example, if no exclusivity agreement was in existence when our purchaser from the previous example of the technology retail business made its enquiries, the vendor would have been entirely honest in responding. If, however, the competitor entered into the exclusivity agreement the day after the vendor and purchaser met, and this fact is subsequently discovered by the vendor before the terms of sale of the business are finalised, failure to disclose this information to the purchaser once the vendor became aware of it would likely constitute misleading and deceptive conduct under s 18.

The remedy for a successful breach of misleading or deceptive conduct claim could include injunctions, damages, rescission of the contract, compensatory orders.



2. Section 52 Claim under the EAA

In the context of the sale of a small business for $450,000 or less, a vendor (or their agent) is required in Victoria to provide a section 52 trading statement to a prospective purchaser before they enter into a binding agreement or accept a deposit.

If the statement is not in the prescribed form, or does not contain the prescribed particulars, or if any of those particulars are stated inaccurately or no statement is given at all then within 3 months after the heads of agreement and/or the contract is signed, and before the purchaser takes possession of the business the purchaser may avoid the contract.

Importantly, if a claim is subsequently brought in connection with the agreement, the onus of proving that the trading statement was duly given in accordance with the EAA lies on the party so alleging. For this reason, a vendor should always ensure it is in a position to produce evidence that a proper trading statement was provided, in case such a claim is made.



3. Breach of Warranty Claim

In addition to any other claims that might be available to an aggrieved purchaser, a party might seek redress through a breach of warranty claim.

In the course of negotiating a contract, the purchaser will typically require the vendor to provide warranties around a range of different aspects of the business. This might relate to the capacity of the vendor to sell and operate the business, or whether there are any material defaults or disputes which might affect the business post completion.

However, one of the standard vendor warranties relates to whether all written information about the business is materially true and correct. This, in particular, puts an onus on vendors to ensure that any financial reports (profit and loss statements, balance sheets, projections etc) disclose a true, fair and accurate reflection of the business.

The remedy for a successful breach of warranty claim could include damages or rescission of the contract.



Professional Conduct Rules

In addition to the above, vendor’s agents have overarching professional obligations to “act fairly, honestly, in good faith and to the best of their ability”. This includes obligations to:


  • not mislead a purchaser or prospective purchaser about a vendor’s instructions; and

  • make all “reasonable enquiries” to ascertain the information relevant to a service or transaction to be provided by the agent.

In short, this imposes positive obligations on vendor’s agents to make “reasonable enquiries” to verify financial information and claims by vendors, and to ensure that any advertisements, statements or representations are verifiable, honest and made in “good faith”.



Conclusion

In conclusion, it is essential that all parties adopt a transparent approach to communication and conduct throughout the course of commercial dealings in order to reduce the risk of a transaction falling through, or becoming subject to legal proceedings under the ACL, the EAA or the common law.


If you wish to discuss any aspect of this article, please feel free to contact the writer.



About the Author

Matthew is an experienced commercial lawyer who regularly advises parties in relation to rent roll transactions.  He is a member of the Law Institute of Victoria (LIV).

This article has been prepared with research assistance provided by Patrick Simon, Graduate.

Matthew Baker-Johnson
Principal
Avery Commercial Lawyers






















Endnotes

Section 18(1) of Schedule 2 of the Competition and Consumer Act 2010 (Cth) (The Australian Consumer Law)
Zuvela v Geiger [2007] WASCA 138; Noor Al Houda Islamic College Pty Ltd v Bankstown Airport Ltd [2005] NSWSC 20.
Winterton Construction Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97 at [114]
Section 52(1) of the Estate Agents Act 1980 (Vic)
Section 52(3) of the Estate Agents Act 1980 (Vic)
Section 52(3) of the Estate Agents Act 1980 (Vic)
Section 10(1) of the Estate Agents (Professional Conduct) Regulations 2018 (Vic)
Section 10(3) of the Estate Agents (Professional Conduct) Regulations 2018 (Vic)

Disclaimer:

The information contained in this article is intended to provide general information only and is not legal advice or a substitute for it.  You should always consult your own legal advisors to discuss your particular circumstances.