Selling a business (pet treats) and the consequences of misrepresentation

Selling a business requires owners and agents to highlight the appealing aspects of the business to attract potential buyers. Emphasising the positives is important, but when information veers into misleading territory, it can lead to significant issues. 

This scenario unfolded when McVeagh Fleming successfully represented 'the purchaser' in a business purchase case in September 2023, involving allegations of misrepresentation, breach of contract, and a Fair Trading Act (FTA) violation against the vendor and sales agent. 

The verdict serves as a clear warning to sellers, underscoring the importance of the accuracy of representations in business sales, as any inaccuracies can result in both legal and financial repercussions.

The case

The purchaser alleged that there were a significant number of misrepresentations made in the pre-sale information made available to it by the vendor and the sales agent, including the value of goodwill, stock, and tangible assets. 

It alleged that:

• the goodwill ($86,000) it purchased had no real value
• the value of the stock it purchased was also not worth the $7,000 it paid
• it did not get all of the tangible assets of $66,000.

The vendor and the sales agent denied the allegations, denied any misrepresentations or that they were essential to the purchaser or that the purchaser was induced to enter into the contract by these representations, and denied that the purchaser had paid a higher purchase price than the value of the business was or would have been offered.

By trial, however, the vendor acknowledged that the packaging of the products was incorrect and did need updating.

The Court grappled with the issue of whether there had been representations, including:

• whether or not the products that made up the pet treats were organic.
• whether the sales 'information memorandum' and other material supplied by the vendor and the sales agent did have a confusing mix of words – 'organic', 'natural', and 'human grade'. 
• whether the branded products manufactured by the vendor were formulated and produced as per the relevant labels, or not.
• whether the business and its products were 'export certified' or not, and whether the documents supplied could make the pet treats.

The ruling

In the end, the Court found that the branded products manufactured by the vendor were not formulated and produced as per the relevant labels. The pet treats often contained different ingredients to those set out on the label, some were missing ingredients set out on the label and as a result, the nutritional value of the treats couldn’t be easily calculated, and were wrong on the labels. This representation was a misrepresentation and it induced the purchaser to enter into the contract. The misrepresentation diminished the benefit of the contract to the purchaser, and it was entitled to damages for this breach.

 The Court also considered that the purchaser was misled by the conduct of the vendor in assuring them that the labels set out correctly the ingredients and the nutritional value of the treats. This was also misleading or deceptive conduct under s.9 of the FTA, as well as the business not being 'export certified' and the purchaser obtaining an award of damages.

As not all trading plant and items were given to the purchaser, it obtained an award of damages.

However, the judge found no representation was made, nor relied upon by the purchaser, regarding the pet treats as being 'organic'. This was mainly because of an email sent to the purchaser just before the agreement was concluded specifically drawing this point to her attention, and an oral warning by the vendor, given before the deal settled.

The Court did not accept the expert evidence that the business IP (pre-purchase) had no value at all at the time that it was purchased. Some pet treats were still being produced and sold using an established network of contacts.

Rather, the Court decided that s.43 FTA would provide a more flexible remedy for the purchaser for the breach of s.9 FTA relating to the failure to provide accurate labels and nutritional information and the export certification statement.

The outcome

As a result, the purchaser was awarded damages for the breach of $30,662, as well as an award of costs in a similar sum. It also obtained a sum of $15,000 from the sales agent (the commission that the vendor paid to it).

This case highlights the need for legal guidance in navigating the complexities of business transactions, particularly in avoiding potential legal consequences as a result of misrepresentations in business sales.

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If you seek guidance on your rights concerning a business sale 'gone wrong' or your responsibilities for the sale of a business - please contact James Turner - Partner at McVeagh Fleming.

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