Buying or selling a business is a major decision (for both parties). Typically, business sale and purchase transactions are conditional on fulfilment of various conditions. The case of Tony Saab v Earlwood Animal Pharm Pty Ltd [2014] NSWSC 436 is instructive as to what may happen when such conditions are not satisfied within the timeframe required under the sale of business agreement.

On 25 September 2013, Mr Saab and Earlwood Animal Pharm (Earlwood) entered into a contract for sale of the Earlwood pharmacy. Under the contract, both parties were required to diligently process all necessary applications and satisfy the requisitions of any relevant party whose consent and/or approval was required.

A sunset clause in the contract provided that:

'in the event that all of the approvals and/or consents have not been obtained within 90 days of the date hereof then either party may by notice to the other rescind this Contract...'

In this case, approval from Medicare was necessary for the sale to take place. Mr Saab promptly sent the Medicare application to an agent for Earlwood, which was then sent to Medicare Australia.

Medicare advised that the application was incomplete due to a failure to provide consent of the landlord or evidence of the transfer of the Lease to the purchaser, which was required from Earlwood. Neither document was received by Medicare by the sunset date.

Mr Saab subsequently terminated the agreement by notice to Earlwood. However, the vendor, Earlwood, refused to accept the rescission and issued a notice of termination, while retaining the deposit.

Did Mr Saab waive his right to rescind the contract?

Earlwood argued that Mr Saab had waived his right to rescind the contract following the expiry of the sunset date by materially contributing to the failure to obtain Medicare approval.

It was held that providing the evidence of the consent of the landlord or transfer of the Lease was the responsibility of the vendor and the purchaser had not materially contributed to such failure. Accordingly, the Court ordered the return of the deposit and awarded costs against Earlwood.

Lessons

  • Pay attention to the specific terms and conditions of the agreement and what the obligations entail.
  • Where time is of the essence under the contract, failure to meet what appear to be simple deadlines may mean the entire transaction falls through.
  • Make sure that your conduct does not amount to a waiver of a right to rescind the contract. Otherwise, the other party may seek damages for wrongful termination.

If you are planning to buy or a sell a business, it is essential that you seek legal advice to ensure you are in a position to satisfy such conditions of the contract within the timeframe required. A legal due diligence at the earliest opportunity will put you in the best possible position to successfully negotiate the sale contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.