Business sales and Australian Consumer Law disputes – when will a court grant relief?

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 circumstances 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 entitle 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 staff’.

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 entitled 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 entitled 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.

Reliance and causation

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 circumstances where the relevant ECRs were not on file, or not executed by both the tenants and agency staff.

In circumstances 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 chose 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.

Remedies

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 entitled 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 establishing 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 shows that buyers should 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 should always ensure they actively engage in the due diligence process, verify any representations made by the sellers, and carefully assess the accuracy 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.