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Commercial Contracts

Author: Andrew Bell

Publish Date: Thursday, July 26, 2007

Did you promise the world? A look at misleading and deceptive conduct in pre-contractual negotiations.

Your company is in the process of negotiating a sale of one of your businesses. You are very anxious for the sale to be completed as the funds from the sale will enable expansion of other company interests. You want the other party to form a good impression of the business during the pre-contractual negotiations and you make several comments to the other party prior to entering the contract about the sale of the business.

Most people are aware of the principle of “caveat emptor” or “let the buyer beware” in real property sales. However, when the transaction occurs in trade or commerce, as is the case here, you need to be aware of the prohibition contained in s 52 of the Trade Practices Act (and similar State and Territory fair trading legislation). Section 52 makes it an offence to engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

In practice this includes the making of representations to the other party that induce the other party to enter into the contract with your company. These representations are referred to as “misrepresentations”, meaning false statements of fact made during pre-contractual negotiations that induce the other party to enter into the contract.

When deciding whether there has been misleading or deceptive conduct, the courts will consider whether an ordinary and reasonable person in the same situation would have relied on the representations.

So, as the words are rolling off your tongue, it may be wise to stop a moment and consider whether the information being imparted by you to the other party could possibly mislead the other party on the viability of the business and the attractiveness of entering into the contract.

What if the other party makes an incorrect assumption (which works in your company’s favour) about the profits generated by the business and you are aware of this assumption? Can you keep quiet? Not necessarily, as silence can constitute misleading or deceptive conduct if the circumstances are such that you are under an obligation to disclose relevant facts.

And if you make vague representations about the future profits able to be made by the business even though you are only taking an educated guess? Could these representations be classified as misleading or deceptive? Yes. If the representations induce the other party to enter the contract and you are not able to show that you had a reasonable ground for holding the opinion then these representations as to the future may constitute misleading or deceptive conduct.

What if you give a copy of an independent valuation to the other party and they rely on the material in this valuation in entering the contract? Are you guilty of misleading and deceptive conduct even though you didn’t prepare the valuation? I n the event that information is provided by a third party such as an independent valuer and is passed on by you to the other party, you need to make sure the other party understands that you are not the source of the information and that you have no personal knowledge of the correctness or incorrectness of the information. You will not be liable for misleading or deceptive conduct if you can show that you were merely passing the information on to the other party and the other party was aware that this was the case.

To ensure that you protect your company from any possible breaches of s 52 of the Trade Practices Act, it is important to that you make a full and fair disclosure of all facts within your personal knowledge during the pre-contractual negotiations. This includes correcting any erroneous assumptions made by the other party even if it is tempting to remain quiet. It also requires a clear message to be given to the other party that any material provided by you that has been prepared by a third party is not within your own personal knowledge.

Try not to get carried away in the heat of the moment and promise the other party the world or represent to the other party that the world is within their reach upon signing on the dotted line. And remember, s 52 of the Trade Practices Act is also protecting your company at the same time as it protects the other party to the contract.

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