Business sales often involve allegations of contraventions of the Australian Consumer Law (ACL). However, a recent Queensland Court of Appeal decision highlights that a misleading statement alone is insufficient for a court to grant relief.
In the case of Babstock Pty Ltd v Laurel Star Pty Ltd (No 5) [2024] QCA 3, the Queensland Court of Appeal reviewed a real estate business sale and the buyer’s claim that the seller had breached the ACL. This case demonstrates how misleading statements may not necessarily entitle a party to court relief.
Case Facts
The dispute involved the sale of a real estate business under two contracts: a business sale contract and a rent roll contract. The buyer claimed that the seller made misleading representations in a sale information booklet provided before signing the contracts.
These representations pertained to entry condition reports (ECRs) for the properties in the rent roll. The seller’s claims included that ‘100% of the ECRs for the properties on the rent roll were held on file’ and that ‘100% of the ECRs for the properties on the rent roll were fully signed by all tenants and agency staff.’
The buyer argued they entered into the rent roll contract relying on these representations, which later caused them loss and damage. They sought to have the rent roll contract declared void ab initio (invalid from inception) under the ACL, which allows such a remedy when misleading conduct causes loss or damage.
At first instance, the trial judge agreed that the representations were misleading, the buyer had relied on them, and this reliance bound the buyer to the contract’s terms. However, on appeal, the seller challenged these findings, arguing that the buyer had not relied on the misleading representations and any reliance did not cause loss.
Decision by Queensland Court of Appeal
In the appeal, it was uncontested that the representations regarding the ECRs were misleading. However, the primary issue was whether the buyer had relied on these representations when entering the rent roll agreement and whether that reliance caused the buyer’s loss.
Reliance and Causation
The Court reiterated that reliance is a factual matter, requiring a review of all the circumstances surrounding the buyer’s decision to enter the contract.
In this case, the buyer’s sole director testified that she had not been involved in the purchase; instead, her husband handled the negotiations and due diligence on the buyer’s behalf. As such, reliance on the misleading statements depended entirely on the husband’s testimony.
The Court examined several critical factors:
· The husband’s testimony indicated that it wasn’t crucial that 100% of the ECRs were on file and signed by both tenants and managing agents.
· The husband was aware that the buyer was responsible for verifying the truth of the seller’s representations and the state of the business during due diligence.
· The husband received a report during due diligence alerting him to inaccuracies in the seller’s claims but didn’t raise this as a concern before finalising the contract.
· At the time of signing, the husband admitted he knew some ECRs were incomplete or missing.
Based on these facts, the Court concluded that the buyer had not relied on the representations when entering the contract. Moreover, the buyer had the contractual right to reject tenancies where the ECRs were missing or incomplete but chose to proceed regardless.
Given the buyer’s awareness of the inaccuracies and their ability to take action during the due diligence phase, the Court found no basis for the trial court’s conclusion that the buyer relied on the misleading statements or that such reliance caused loss.
Remedies
The buyer sought to have the rent roll contract declared void ab initio. The Court emphasised that this remedy under the ACL is only available if a party suffers loss or damage due to misleading conduct.
Since the buyer failed to prove the required elements of the cause of action, the Court held that the buyer was not entitled to the relief sought.
Comments
Business sale transactions frequently lead to ACL contravention allegations, and, as in this case, parties sometimes make inaccurate representations. However, this decision highlights that simply proving a misleading representation is insufficient. It must also be shown that the party seeking relief relied on the representation, and this reliance caused their loss.
The case serves as a reminder for sellers to ensure that all information given to potential buyers is accurate and substantiated. Contracts should also place the onus on buyers to conduct thorough due diligence.
How NB Commercial Law Can Help
At NB Commercial Law, we specialise in drafting and reviewing business sale contracts across various sectors and industries. If you wish to discuss this article or any other business transaction or dispute, please contact Luke Steptoe at [email protected].