The Risks of Stretching the Truth: Misleading and deceptive conduct in a sale of business

When we think of consumer law, we often think of dodgy goods. What we don’t often think of is the sale of a business.

“The Uni Pub”, a well-known Canberra institution for many years, is currently the subject of ACT Supreme Court proceedings. In August 2016 Sapme Pty Ltd (the Seller) sold the business of The Uni Pub to Jornad Pty Ltd (the Buyer). After apparently struggling for some time, in March 2017 The Uni Pub closed its doors. The Buyer commenced proceedings against the Seller and its directors in March 2017 for misleading and deceptive conduct, a breach of section 18 of the Australian Consumer Law (ACL).

The Buyer and its director claim that they would not have gone through with the purchase had it not been for the misleading representations by the Seller that the business was supporting itself financially, was up to date with its bills and rent, and that the fit out was serviced and working well. The Seller’s defence appears to be that the Buyer was aware the business wasn’t doing well (pointing to a sale price of $1 plus stock) and that the Buyer was obliged by the contract (and warned by the business broker) to satisfy themselves about the truth and accuracy of all information given in relation to the sale.

This case is one worth watching—applying the ACL in a sale of business context would be a powerful tool to deter sellers and business brokers from making misleading representations when selling a business.

We have already seen from cases concerning the sale of land that the latitude of potential misrepresentations has been cast pretty widely by the courts. Failing to disclose road widening proposals, inflated claims in advertising brochures, false answers to questions about pending litigation, and even ‘silence’ have all been held to constitute misleading and deceptive conduct entitling a buyer to rescind the sale contract.[1]  It is important to recognise section 18 of the ACL does not distinguish between fraudulent and innocent misrepresentations and there is no requirement that the conduct is intentional. This is mitigated only by whether it is “reasonable” to rely on the representations and whether there has been actual reliance on the representations.

So, what can you do to protect yourself if you are selling your business?

To minimise risk:

  1. Don’t say anything about the business that can’t be verified by written evidence (rent payment receipts, service records of plant and equipment);
  2. Don’t exaggerate the performance of the business – while you might be proud of the performance of your business and your statements could be “mere puffs” (which are self-evident exaggerations or expressions of opinion not likely to be taken seriously and importantly – not legally binding) but the worse case scenario is the exaggerations are false or misleading representations (and lead to a case like The Uni Pub);
  3. Do put the onus on the buyer to satisfy themselves about the status of the business; and
  4. Do tell your lawyer if any statements you have made need to be corrected before you sell.

Contractual provisions excluding prior representations might not always be enough (as evidenced by this case); however, having the buyer sign a contract which declares that they have satisfied themselves about the state of the business can be a strong protection for claims such as these.

If you require any legal advice about the sale of your business, please contact us.

[1] CH Real Estate Pty Ltd v Jainran Pty Ltd; Boyana Pty Ltd v Jainran Pty Ltd [2010] NSWCA 37; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31.