- A claim of "misleading or deceptive" is sometimes regarded as the great cure-all in business disputes. However, courts will not disregard the importance of the contractual terms that the parties agreed on.
Those shares you bought turned out to be dogs? You were misled into buying them. Your brand new DVD-toaster combination burns your crumpets? The advertising was deceptive. That business you took over is a disaster? The vendor engaged in misleading or deceptive conduct.
While it's easy to claim misleading or deceptive conduct, convincing a court is a different matter altogether.
In the October 2005 M&A Insights, we discussed the issue of disclosure during contract negotiations. We noted that non-disclosure of information by one side may be misleading or deceptive if the other side has a "reasonable expectation" that relevant information will be disclosed during the negotiations.
A new court decision looks at the extent to which a reasonable expectation may arise in business negotiations. The lesson which emerges is that caveat emptor is still alive and well.
The grease trap
Donne Place Pty Ltd agreed to buy a restaurant from Conan. A few weeks later, Donne informed Conan that it was terminating the contract. Conan kept Donne's deposit and sued for damages.
At issue was a grease trap (or, to be more accurate, an absence of a grease trap).
Conan had a waste disposal licence which allowed it to use the local council's sewer system. The licence required Conan to install a grease trap. However, the council's policy was not to enforce the grease trap requirement, provided a licensee paid a "non-compliance" charge of $1,200 pa.
This matter was, apparently, not disclosed to Donne during the pre-contract negotiations. Donne claimed that the "non-compliance" with the grease trap licence was a breach of the sale contract (which contained a warranty that Conan was not in breach of any licence). It also claimed that non-disclosure of the grease trap issue had been "misleading or deceptive" conduct under section 52 of the Trade Practices Act.
The breach of contract claim failed. The court said that the council's "non-compliance" fee system meant that there was no breach of the licence.
The "misleading or deceptive" claim rested on a combination of Conan's silence about the licence and the fact that the sale contract contained the warranty about Conan's not being in breach of any licence.
As noted above, if there is a complaint about non-disclosure of a matter in negotiations, the central issue is whether a party had a reasonable expectation that disclosure would have been made.
The court emphasised that what is a reasonable expectation will depend upon the circumstances of the negotiations. In commercial negotiations, there is not generally an expectation that both sides will lay all their cards on the table:
" ... where parties are dealing at arms' length in a commercial situation in which they have conflicting interests it will often be the case that one party will be aware of information which, if known to the other, would or might cause that other party to take a different negotiating stance. This does not in itself impose any obligation on the first party to bring the information to the attention of the other party, and failure to do so would not, without more, ordinarily be regarded as dishonesty or even sharp practice."
In other words, there is no overriding obligation to disclose everything simply because you happen to be in negotiations. To determine whether particular negotiations gave rise to a reasonable expectation of disclosure, it was necessary to look at the negotiations themselves. In this case, Conan had done or said nothing that would have led Donne to expect any disclosure other than what ended up in the contract. The parties had dealt with the issue of disclosure by inserting into the contract what the court described as "elaborate provisions for disclosure". Conan had complied with all those requirements.
Contract is king
The importance of the final contract in relation to "misleading or deceptive" claims is emphasised by another recent court decision.
Under a contract, Frontier Touring paid money to Kidz.net to use in establishing a business in the USA. Frontier later sued Kidz.net for various breaches. One of its claims was that it had been misled by statements made by Kidz.net during the negotiations for the contract. Those statements were that the money would only be used for specified purposes. Frontier alleged that Kidz.net used some of the money for altogether different purposes.
Frontier's "misleading or deceptive" claim fell down because it didn't raise matters that weren't covered by the contract.
In the court's view, Kidz.net's statements were only statements about what it was prepared to offer by way of a contract. As it turned out, the use of the money was covered by a clause in the contract. There were no representations additional to what was written into the contract itself. The fact that Frontier had insisted on such a clause being in the contract showed that it hadn't simply relied on statements made during the negotiations:
"In short, [Frontier] distrusted the pre-contract representations and wanted to see them turned into contractual terms (as they in due course were). Such lack of reliance on them is enough to deprive [Frontier] of the ability to obtain statutory relief in reliance on ss 51A and 52 of the Trade Practices Act ... ."
Overall, these recent cases appear to reflect some shift in judicial attitude, with the effect that claims for misleading and deceptive conduct arising from negotiated commercial transactions seem to less readily be upheld by the courts.
That's not to say that aggrieved purchasers or investors still won't claim to have been misled, but the courts generally seem to be less sympathetic to such claims and will instead place greater emphasis on the terms of the contract agreed on by the parties.
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.