Navigating Misleading Representations in Business Sales: Lessons from a Queensland Court of Appeal Case

Business sales often trigger concerns about breaches of the Australian Consumer Law (ACL), but proving misconduct requires more than just pointing out misleading statements. A recent Queensland Court of Appeal case sheds light on this issue, illustrating a common scenario where mere allegations of misleading conduct might not suffice for legal relief.

Case Overview:

In Babstock Pty Ltd v Laurel Star Pty Ltd (No 5) [2024] QCA 3, the Queensland Court of Appeal examined a dispute over the sale of a real estate business. The buyer claimed that misleading representations in the sales information book led to their financial loss.

Allegations:

The buyer asserted that the seller misrepresented the entry condition reports (ECRs) for properties in the rent roll, specifically that these were on file and fully signed, which later turned out to be untrue.

Trial and Appeal:

Initially, the trial judge ruled in favour of the buyer, finding the representations misleading and the buyer's reliance justified. However, on appeal, the court scrutinized the facts surrounding the transaction.

Key Findings:

• Reliance and Causation

While it is true that the representations about the ECRs were misleading, the real question was whether the buyer had relied on the representations in entering into the agreement and whether the reliance was causative of the loss suffered.

In this case, the buyer's reliance on the inaccurate information was challenged as the buyer's director was not directly involved in the purchase. Moreover, the husband, who conducted negotiations, also knew about discrepancies in the representations but did not exercise their contractual right during the due diligence stage to reject tenancies in case of misleading conduct and instead proceeded with the deal regardless.

Thus, the Court considered that the buyer had not relied on the representations when entering into the contract and, consequently, no reliance could be a basis for the financial loss. 

• Remedies

The remedy sought by the buyer to have the contract declared void ab initio is only available when a person has suffered or is likely to suffer loss or damage due to 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.

Conclusion:

This case should serve as a cautionary tale, highlighting that:

• Mere allegations of misrepresentations are not enough to obtain relief under the ACL unless there is a showing of reliance on the representation and that the same caused loss and damages to the claimant.
• Sellers must ensure that all information provided to potential buyers is accurate and verifiable.
• Buyers should actively engage in due diligence, verify seller representations, and assess critical information meticulously before proceeding with a purchase.

Facing similar disputes or business transactions? Our experienced team at The Franchise & Business Lawyers is here to assist you every step of the way. Contact us today for expert advice tailored to your needs.