Incorrect sales figures and other misrepresentations in a business sale

All business owners and agents must be careful when providing prospective purchasers with sales figures and other information, particularly where reliance will be placed on that information, without separate verification by the prospective purchaser. This issue arose in a December 2019 decision by the Supreme Court of New South Wales regarding a confectionary distribution business – Badger v John Kagelaris Pty Ltd [2019] NSWSC 1792

Background

In January 2017, the plaintiff entered into a contract for the purchase of the defendants’ wholesale confectionary distribution business in south-western Sydney for $118,000 – $112,000 for goodwill and $6,000 for stock. The contract contained a warranty by the vendor regarding the accuracy of past sales and profits as disclosed in a spreadsheet provided to the plaintiff. The contract also contained an express statement that the plaintiff (as purchaser) acknowledged that he had made his own and all necessary enquiries in relation to the past sales and profit figures and did not rely on them in entering into the contract.

At the same time as entering into the contract, the plaintiff entered into an agency distribution agreement with Associated Products Pty Ltd (“AP”) under which the plaintiff was appointed as an AP agent to distribute AP confectionary products in south-western Sydney.

The plaintiff paid the balance of the purchase price on 9 and 10 February 2017 and shortly after, attended training in the operation of the business.

On 17 February 2017, the plaintiff indicated that he wished to sell the business because of a promotion opportunity at his employment.  After failing in his attempts to sell the business back to the defendant, he listed the business for sale via Gumtree and an agent, and asked the vendor and the distributor for sales figures to provide prospective purchasers.

He subsequently withdrew the business from sale as he formed the view that the “profit was fake”.  By April 2017, he believed that it was not possible that the business made the sales and profits provided to him in December 2016, based on his experience that most of the retailers he visited were not interested in purchasing any confectionary products from him, as well as other matters.

It turned out that at least 43 retailers listed as customers of the business had never been or were no longer customers of the business or had not bought any products from the business within the 6 months prior to the plaintiff’s purchase of the business.  Further, another 34 had not purchased in the 3 months prior to his purchase and 21 of those had purchased a total of 10 or less products in the 6 months prior.

Claim

Section 18(1) of the Australian Consumer Law (“ACL”) (as contained in Schedule 2 to the Competition and Consumer Act 2010 (Cth)) 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.

The plaintiff claimed that he entered into the business purchase contract in reliance on inaccurate and misleading information about the business which was contained in 2 emails sent to him in December 2016 by AP’s director, prior to the exchange of contracts.  He purported to terminate the contract as a result, and commenced the court proceedings in November 2018.

Orders sought

The plaintiff sought the following orders to be made by the Court:

• The contract was void under section 243 of the ACL
• Compensation pursuant to section 237 ACL in relation to misleading or deceptive conduct (in the form of the pre-contractual representations) alleged to have been engaged in by the vendors
• The distributor’s director and the business’ director were liable as accessories to the misleading conduct
• The contract was validly rescinded (in equity)
• The amount paid for the business based on the pre-contractual misrepresentation contained in the December emails be refunded
• The contract was breached, resulting in loss and damage being suffered

For various reasons, the only issue determined by the Court related to the misleading and deceptive conduct claim.  At the time of the hearing, the vendor company had been deregistered – pursuant to section 601AD(1) Corporations Act 2001 (Cth), the company ceased to exist, although the officers of the company may still be held liable for things done before the company was deregistered.

The defendants’ positions

The vendor’s director accepted that some of the information contained in the December email did not reflect the actual financial position of the business, but were his estimates.  AP’s director accepted that some of the information about the business contained in the emails was inaccurate and that some of the representations were misleading and deceptive, but contended that he did not make the representations and therefore was not primarily liable or liable as an accessory for misleading and deceptive conduct under the ACL.

What representations were made, and by whom?

The Court noted that the figures included in the December emails sent to the plaintiff were based on estimates made, rather than actual sales, costs and profit figures based on the operation of the business.  Other representations had been made to the plaintiff regarding the vendor’s director’s past experience with the business.

The Court considered the position of a corporation’s director, and whether the conduct is on behalf of themselves and/or the corporation.  It referred to the principle founded in Yorke v Lucas [1985] HCA 65 – a person who merely acts as a conduit and does nothing more than pass on information will not be found to have engaged in misleading or deceptive conduct.  This is a question of fact, determined by reference to all the circumstances of the particular case.  The statements made by AP’s director in this instance suggested that he had knowledge of the business, was in a position to provide a sound judgment as to its viability and had access to the relevant figures.

Considering other circumstances surrounding the representations made, the Court stated:

it seems to me that a reasonable person standing in the shoes of [the plaintiff] would take the information contained in the 15 December emails, which was not subject to express qualification or disclaimer by [AP’s director], as being endorsed or approved by him, rather than as simply information passed on by him in which he had no interest or knowledge and to which he impliedly disclaimed any belief in the truth or falsity of the messages he was sending.

The method of transmitting to the plaintiff the information received from the vendor suggested that AP’s director was accepting the truth of the information and therefore also made the representations.

The Court also referred to the consent or authority provided by the vendor to AP’s director to send the plaintiff the information in the emails which contained the representations – thereby making AP’s director an agent of the vendor in relation to the business sale.

Any conduct engaged in on behalf of a corporate or a person by an agent within the scope of their actual or apparent authority or at the direction of the corporate or the principal is taken, for the purposes of the ACL, to have been engaged in also by the corporate and principal (ss 139B(2) and 139C(2)).

The agent may also be exposed to primary liability as well – not simply as an accessory – because he was directly or indirectly knowingly concerned in or party to the misleading and deceptive conduct, in that he had to have known the facts and circumstances giving rise to the falsity of the representations made.

Did the representations cause the plaintiff to suffer loss or damage?

The Court referred to the principles set out in Havyn Pty Ltd v Webster [2005] NSWCA 182:

• Loss or damage is causally connected to a contravention of the Act if the conduct materially contributed to the loss or damage. It is not necessary that it be the sole, principal or dominant cause;
• Acts done by the representee in reliance upon the misrepresentation amount to a sufficient connection to satisfy the concept of causation;
• A plaintiff’s right to relief for loss of which the contravening conduct was a cause does not depend upon him or her having taken reasonable care for his or her own interest.; and
• The onus of establishing that the quality of the reliance negates the causative effect of the conduct lies on the party in contravention of the Act.

The Court noted that the “no reliance clause” in the contract cannot operate to negate the effect of misleading conduct.  The plaintiff gave evidence that he did not consider it necessary to check the sales figures as he believed what he had been given.

Representations about the past sales, cost of goods, profits and the number of current customers of a business are, by their nature, persuasive and to be expected to induce a person’s decision to buy a business.

Held

The Court held that both the vendor’s director and AP’s director engaged in misleading and deceptive conduct, for the reason that the sales figures provided materially misstated the sales figures, and that that conduct caused the plaintiff to enter into the contract and suffer loss.

The Court declared that the contract was void and that the plaintiff was entitled to compensation for his loss in the amount of $114,991.48, being the purchase price less the profit the plaintiff made from operating it during a 3 month period.