How can I avoid Vendor misrepresentations when buying a business?

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Table of Contents

• Do you have a valid claim?
• ACL
• Case Law
• Conclusion

It is commonplace, and indeed sensible, to undertake certain due diligence before purchasing a business. Of course, the profitability, revenue, client or customer base and ongoing contracts are all areas of which a potential purchaser would wish to be informed. These areas need to be checked during your due diligence to prevent vendor misrepresentations.

But what happens if a statement, made either verbally or in writing, by the vendor about one of these key factors was incorrect or misleading? If it turns out that these impressive levels of profit, which you relied upon in proceeding with the transaction, aren’t so impressive after all, you might find yourself facing legal problems.

Do you have a valid claim?

Before you rush off and make demands, there are a number of factors that must be considered to determine if you have a valid claim.

In a legal sense, this conduct usually raises the following legal allegations;

1. Misleading or deceptive representations being made regarding the performance or other attributes of the business in breach of the Australian Consumer Law; and/or
2. Misrepresentation at common law; and/or
3. Breach of the terms of the Sale Agreement.

ACL

Section 18 of the Australian Consumer Law (ACL), provides that “A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.” This legislative provision reflects misrepresentation at common law.

But whether the statement or disclosure amounts to a breach of this statutory provision/ misrepresentation will be dependent on the facts in the case.

Case Law

Importantly, as Barrett J noted in Vitek v Estate Homes Pty Ltd [2010] NSWSC 237 at [34];

“In a situation of arm’s length commercial negotiations … there is no generally prevailing legal requirement that one party not take advantage of superior knowledge; much less is there a requirement to surrender the advantages that superior knowledge entails.”

Further in that case, His Honour noted the following facts in support of his conclusion that the alleged failure to disclose in that case had not been misleading or deceptive:

• the entry into the sale agreement followed extensive negotiations;
• the parties were represented by solicitors; and
• the contract that was prepared contained extensive special conditions.

Further, a carefully drafted exclusion clause and/ or disclaimer forming part of the sale contract may prevent an otherwise successful claim of misrepresentation/ misleading and deceptive conduct from being successful.

In Downey v Carlson Hotels Asia Pacific Pty Ltd [2005] QCA 199, for example, the Court upheld an exclusion clause, noting it would do so: “if the clause actually has the effect of erasing whatever is misleading in the conduct”.

Conclusion

These are just some of the legal issues that need to be considered in determining whether to proceed with such a claim. Your commercial lawyer will be able to look at the documents and facts, and advise you further. Get in touch with LegalVision today on 1300 544 755, and we will provide you with a free legal health check!