Misleading or Deceptive Conduct in the Sale of a Business

7 January 2020 in Articles

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Allegations of misleading or deceptive conduct in the sale of a business are not uncommon, especially where the business does not perform as expected. A buyer of a business is responsible for checking the value and suitability of the business before a purchase is made. However, you must be careful when making representations during negotiations for the sale of your business as you may be responsible to the buyer for any loss caused by misleading or deceptive statements during those negotiations.

What is misleading or deceptive conduct?

Section 18 of the Australian Consumer Law (contained within Schedule 2 of the Competition and Consumer Act 2010 (Cth)) prohibits any person from engaging in misleading or deceptive conduct in trade or commerce. There are also prohibitions in each state against engaging in misleading or deceptive conduct. The law extends widely in this area and:
  1. extends to companies, as well as individuals;
  2. applies to transactions anywhere in Australia;
  3. applies to oral or written statements, or a combination of oral and written statements;
  4. extends to a failure to speak, if you have withheld information that affects the correctness of something you have said;
  5. extends to silence, if the situation is one where you would normally be expected to disclose certain facts;
  6. applies to promises, if you had no intention of keeping the promise; and
  7. applies to a prediction as to the future or an inaccurate opinion, if there was no reasonable basis for making it.
Misleading or deceptive conduct is hard to describe because the context in which a statement is made, and the entire circumstances of the sale, must be considered. A statement will generally be misleading or deceptive if the statement tends to lead the buyer into error. If the buyer is a sophisticated business person, it is less likely that someone in the position of the buyer will be led into error. Due to the complexity of business sales, there are many ways in which you may engage in misleading or deceptive conduct when selling your business. For example, representations as to the value or financials of a business, the contracts held by a business, the liabilities of a business, or the number of employees of a business are all common areas of complaint. You may also be responsible for damages if you give an opinion about the future performance of the business without having a reasonable basis for making that opinion.

What if you did not intend the statement to be misleading or deceptive?

You may engage in misleading or deceptive conduct even if you make the statement innocently, or do not intend for the statement to be misleading or deceptive.

Does it matter if you agreed that no representations were made in negotiations?

A seller will often include a term in a sale of business contract which states that the buyer did not rely on any representations when deciding to enter into the contract. However, while this may be taken into account when assessing the overall circumstances, this will not necessarily protect the seller. You can’t “contract out” of the Australian Consumer Law.

How do you protect yourself?

It is difficult to make sure you are protected against a claim for misleading or deceptive conduct in the sale of a business because the law is expansive. However, there are a few steps you may take to attempt to protect yourself, such as:
  1. avoid relying on conversations with the buyer and, if you do have any conversations, ensure that you confirm all discussions in writing;
  2. avoid expressing an opinion or making statements about the future performance of the business and, if you do, make sure that you set out (preferably in writing), exactly how you formed the opinion; and
  3. allow the buyer plenty of time to consider the financials of the business and encourage the buyer to seek independent advice from an accountant and lawyer before purchasing the business.
If you or anyone you know requires further advice or assistance, please don't hesitate to contact us.