FAILURE TO PROVIDE UPDATED FINANCIAL INFORMATION MISLEADING AND DECEPTIVE

Author: Valentina Misevska

Publish Date: February 6, 2006

A court[1]has found that a vendor of a business engaged in misleading and deceptive conduct by omitting to provide a purchaser with updated financial information as to the income and prospects of the business being sold.

The Court found that by reason of the information provided by the vendor to purchaser, the purchaser was led to believe that the business was capable of maintaining, perhaps even improving upon, a particular turnover (“the impression”).  At the time the information was provided to the purchaser it was correct, or at least was not incorrect, but the facts and projections were inaccurate by the time of the contract and this was known to the vendor. 

The vendor should have corrected the impression given and that the failure to do so constituted misleading and deceptive conduct.  In the context of a sale of business, financial information was obviously given for the purposes of identifying the trading of a business up to the contract date and unless updated information is provided, an ordinary person could and would infer that information previously provided showed the current trading position.   The evidence also established that the purchaser would not have bought the business had the updated information been provided.

The Court noted that a person’s silence will be misleading and deceptive if, objectively assessed, a person in the plaintiff’s position would be entitled to expect or infer that the defendant would disclose certain information.  In this case, such certain information included the fact that a business was in decline.

The Court also looked at the standard of person by which misleading and deceptive conduct is measured against in the context of one-on-one negotiations involving the sale of a business, and found that the standard was that of the ordinary man of average or perhaps below average intelligence (but not exceptionally stupid) who may be trusting and gullible.  The Court stated that a careful and vigilant person may have deduced from certain information provided that the business was in decline, but this did not mean the failure to update was not capable of misleading and deceiving the ordinary man. 

When looking at the question of damages the Court thought that the purchaser was entitled to damages in an amount equal to the difference between the price the purchaser paid for the business and the market value of the business at the date of acquisition (“the first head of damages”).

The Court did not however consider that the plaintiff was entitled to damages for loss of profits in the conduct of the business in this case because:

• there was no evidence that the purchaser had relied on a representation that the profit would be $X per annum in the sense that the purchaser had an expectation it would be achieved
• it would result in double compensation
• a failure to achieve a certain level of profits can’t be described in the circumstances of this case as loss or damage caused by the misleading and deceptive conduct of the vendor. It was not the loss of the value of a promised benefit because the statement of projected profits was not a warranty
• absence a warranty or promise as to profits at a specified level, the purchaser cannot recover the profits that might have been made had the business been worth the figure initially paid.

This case highlights the importance of providing complete and accurate disclosure of financial information in sale negotiations and identifies why it is important not to make any warranties as to expected future income or profit.  It is also another timely reminder that misleading and deceptive conduct can occur by omitting to do an act as well as by committing an act.

If you are considering, or are in the process of, buying or selling a business and require assistance with pre-contract disclosure, due diligence investigations, negotiations, preparation or review of contracts please contact Valentina Misevska on 49076316.

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