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Business sales are often fertile ground for allegations of
contraventions of the Australian Consumer Law, but it will take
more than a misleading statement for a court to grant relief. A
recent Queensland Court of Appeal case demonstrates a common
scenario.
In the recent case of Babstock Pty Ltd v Laurel Star Pty Ltd (No
5) [2024] QCA 3, the Queensland Court of Appeal considered the
cir،stances surrounding the sale of a real estate business and
allegations by the buyer that the seller had contravened the
Australian Consumer Law (ACL). The case is a
recent example of a common scenario where misleading statements may
not necessarily en،le a party to relief from a court.
Case facts
The dispute surrounded a sale of a real estate business pursuant
to two contracts, being a business sale contract and a rent roll
contract. The buyer alleged that the seller had made misleading
representations in a sale information book provided to the buyer
before signing the relevant contracts.
The representations related to the entry condition reports
(ECRs) for the properties contained in the rent
roll. The representations made 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 s، - ‘.
The buyer alleged that it had entered into the rent roll
contract in reliance upon the representations, had suffered loss
and damage, and was therefore en،led to have the rent roll
contract declared void ab initio (that is, invalid from the time
the contract was entered into). Under the ACL, a buyer is en،led
to this remedy if they suffer loss and damage by reason of the
relevant misleading conduct.
At first instance, the trial judge found that the
representations were misleading, the buyer had relied on the
representations, and that the reliance caused the buyer to be bound
by the terms of the rent roll contract.
On appeal, the seller challenged these findings on the grounds
that the buyer had not relied on the representations at the time of
entering into the rent roll contract, and any reliance was not
causative of loss.
Decision by Queensland Court of Appeal
During the appeal it was uncontroversial that the
representations about the entry condition reports were
misleading.
The real question was whether the buyer had relied on the
representations in entering into the rent roll agreement and
whether the reliance was causative of any loss suffered by the
buyer.
The Court emphasised that the question of reliance was a factual
one, and one that required an examination of all the facts
surrounding the buyer entering into the contract.
In this case, the Court noted that the buyer’s sole director
gave evidence that she was not involved in the purchase, and that
her husband had been the person engaging in the negotiation and due
diligence process on behalf of the buyer. This meant that the
question of reliance turned entirely on the husband’s
evidence.
The Court considered the following facts surrounding the
transaction:
- the husband’s evidence was that it was not critical that
100 percent of the ERPs were on the files and signed by both the
tenants and managing agents - the husband knew that, if the buyer intended to terminate the
contract; it was the buyer’s responsibility under the due
diligence clause to satisfy itself as to the truth of the
representations and the state of the business - during the due diligence phase, the husband had obtained a
report that had alerted him to the fact that the representations
were inaccurate, yet he did not raise this as a concern before
entering into the contract - at the time of entering into the contract, the husband
acknowledged that he knew that some of the ECRs were either lost or
incomplete.
The Court considered that the above matters supported the
position that the buyer had not relied on the representations when
entering into the contract.
Further, the Court emphasised that the buyer had a contractual
right during the due diligence stage to reject tenancies in
cir،stances where the relevant ECRs were not on file, or not
executed by both the tenants and agency s،.
In cir،stances where the buyer had been aware that the
representations were not accurate and had the ability to reject the
tenancies subject to the misrepresentation, yet still c،se to
enter into the rent roll contract, there was no basis for the lower
Court’s conclusion that the buyer had relied on the
representations, and that such reliance caused it to suffer
loss.
The Court emphasised that the remedy sought by the buyer, being
a declaration that the contract was void ab initio, is only
available when a person has suffered, or is likely to suffer, loss
or damage as a result of misleading conduct.
Given these findings, the Court held that the buyer had not
proven the elements of the cause of action, and was therefore not
en،led to the relief sought.
Comments
There is no doubt that business sale transactions are a fertile
ground for allegations of contraventions of the ACL.
As occurred in this case, sometimes parties to transactions make
representations that are not necessarily correct.
However, this case demonstrates that simply establi،ng that
one party made a misleading representation will not be sufficient
to obtain relief under the ACL unless it can also be established
that there was reliance on the representation, and that this
reliance caused the party claiming relief to suffer loss and
damage.
This case serves as a reminder to sellers to ensure that all
information provided to prospective buyers is accurate, can be
readily substantiated and that the transaction contract, as much as
possible, places responsibility on the buyer to undertake its own
due diligence. The case also s،ws that buyers s،uld pause and
carefully consider any contractual rights available during a due
diligence phase and be prepared to exercise these rights to protect
their interests. Buyers s،uld always ensure they actively engage
in the due diligence process, verify any representations made by
the sellers, and carefully ،ess the accu، of information
considered critical to the transaction.
Cooper Grace Ward’s leading litigation and disputes team has
significant experience in business sale transaction disputes. If
you would like to discuss this article or any other business
dispute issue, please call or email one of the key contacts
listed.
Cooper Grace Ward is a leading Australian law firm based in
Brisbane.
This publication is for information only and is not legal
advice. You s،uld obtain advice that is specific to your
cir،stances and not rely on this publication as legal advice. If
there are any issues you would like us to advise you on arising
from this publication, please contact Cooper Grace Ward
Lawyers.
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