CASE STUDY 1

  • Category:
    Law
  • Document type:
    Case Study
  • Level:
    Undergraduate
  • Page:
    3
  • Words:
    1793

Case Analysis

Case Analysis

The process of negotiations leading to formation of a contract or sale of a commodity plays a critical role in determining whether the other party enters into contract or not. However, misrepresentation of facts about the commodity can lead to legal issues subject for determination by a court of law. This paper will present a case scenario demonstrating the application of the Australian Competition and Consumer Act 2010 chapter 2 with regards to issues arising from the negotiation process prior to purchase or entering into a legally abiding contract. The case involves a business sale transaction in which Wheelie bought a bicycle store from Mr. Spoke under suspicious misrepresentation of facts about the business past performance. In this case, the paper identifies elements of fraudulent misrepresentation of facts during the negotiation process with the view to advise Wheelie whether he has a strong case against Mr. Spoke. The argument will be backed up by the provisions of the Competition and Consumer Act 2010 and related past court rulings.

Wheelie expressed his interest in purchasing Spoke’s bicycle store upon learning of his desire to sell it as he commenced his retirement. Following inquiries, Mr. Spoke made comments about the store’s past and future profitability and based on such comments wheelie made the decision to purchase the store business. However, review of the facts later revealed that the accounts were inflated by 55%. Further analysis of some documents found in the store including cash receipts and tax documents revealed that the business had not been in a stable financial position as depicted by Mr. Spoke’s comments. This raises an element of fraudulent misrepresentation or deception aimed at enticing Wheelie to purchase the store. Therefore, Wheelie can move to court to seek rescission or reverse of the transaction or damages resulting from the fraudulent misrepresentation.

Rule/law

The Australian Consumer Law (ACL) under chapter 2 provides general standards of business conduct including protection of consumers or business entities from misleading or deceptive conduct1. Under this chapter, the law considers any form of deception or provision of misleading information during a contract or sale of a commodity unlawful2. The law includes failure to disclose relevant information, opinions, predictions or promises to be misleading or deceptive.

The information or facts are considered a misrepresentation or deception, if it deviates from the actual facts, and there is sufficient prove that such facts or statements induced or were relied upon by the other party to enter into the contract in question3. Alternatively misrepresentation can be defined as a false statement of material fact, not necessarily a term of the contract but one which had the effect of inducing the other party to enter into a contract4. A court can rule in favor of contract rescission by the complainant if it establishes reasonable reliance on the false statement or misrepresentation in making the decision to enter into a contract5.

Application of Rescission as a remedy to misrepresentations allows reversal of the transaction with the plaintiff or aggrieved party receiving a refund and other costs incurred during the transaction. The aggrieved party may also seek for damages arising from the misrepresentation or the contract in general.

However, application of the equity principle which is permitted by the law may allow the other party not to enforce a contract but ensure that the two parties are restored to their pre-contract positions. This is known as the restitutio in integrum. On the other hand, common law does not award any damages for a misrepresentation that is found to be innocent or neither fraudulent nor negligent6.

Application

The actions of Mr. Spoke have clear demonstrated the intention to entice Wheelie to purchase his bicycle store through misrepresentation of facts about the business past and future profitability. It was established that he had inflated his accounts by 55% with the view to convince Wheelie, the purchaser that indeed the business was doing well. The misrepresentation of accounts and the inflation alone provide a strong basis for Wheelie to seek a legal redress and possibly rescind the contract or get damages arising from the purchase of a non-profitable business. According the Australian Consumer law 2010, a party to a contract should not present false information, deceive or misrepresent material facts to the other party with the view to influence their decision to purchase or enter into a sale agreement7. There is sufficient evidence that indeed, Wheelie relied on the accounts showing past and future misrepresentation to purchase the business only to realize that facts were false and the business was actually in a financial instability. In this case, Wheelie through his lawyers can argue a strong case for the contract rescission and possible damages resulting from the contact. With the business past and future profitability not promising, Wheelie should consider seeking rescission orders from the court in order to recover his money and perhaps look for another business venture that can sustain his livelihood8. Based on the restitutio in integrum principle, Wheelie has the legal right to push for restoration to the post-contraction financial position through refund of the total cost and any other costs accrued in the process of the contract or running the business the time he has9.

Although Mr. Spoke may argue that his prediction about the future profitability cannot be used against him, Wheelie could site the determination in the Quinlivan v Australian Competition and consumer commission10, in which the judge stated that a misrepresentation of the future cannot be declared not misleading by virtue of the argument that the person had reasonable grounds for making the representation. In this case, Mr. Spoke cannot rely on his argument for representing the company as likely to have a bright future because the prediction about the business future was misleading by virtue of its poor financial performance in the past. Furthermore, Wheelie’s argument for misrepresentation of facts and its implications before the law can be strengthened by the ruling in the Campbell v Backoffice Investments Pty Ltd11 which emphasizes on the need for representation of all facts about a business whether positive or negative prior to the sale contract. The ruling in this case disqualifies a likely defense by Mr. Spoke based on the obligation to counter check the information before entering into the contract. The court placed the obligation to ensure statement of facts of the contract on the seller thus eliminating the possibility of Mr. Spoke using that as his defense in the case.

Upon discovery of the misrepresentation, Wheelie has the duty to prove to the court that he particularly or to a greater extent relied on the misrepresentation to enter into the contract. The case scenario presented shows that Mr. Spoke had a reason to push for fast sale of the business because he needed money to travel. In this case, the urgency to sale the business would have compelled him to misrepresent the facts about the business to Wheelie with the view to influence his decision to buy the business. It is further evident that inflation of the accounts by 55% was meant to achieve a certain financial target at the expense of the purchaser, a phenomenon that indeed justifies that Mr. Spoke misrepresented the facts about the business to induce Wheelie to purchase it. According to the Australian Consumer Law 2010, the plaintiff needs to prove to the court that indeed the misrepresentation induced him to enter into the contract.

Lastly, the court will also need to determine that Mr. Spoke made the cited misrepresentations intentionally as determined in the Holmes v Jones12. The jury found the need to establish that the person making the misrepresentation was aware or had knowledge about them before stating them to the contracting party13. This is clearly so with the defendant because he had cash receipts and tax documents as well as his first-hand experience with the business profitability over the past years. This is supported by a similar case involving Esso Petroleum v Mardon, in which the defendant was assumed to have the capacity to predict the profitability of the business based on his previous experience14. It is clear that Mr. Spoke knowingly made the false statement and even inflated the business accounts to suite his target financial need at the expense of the purchaser, Wheelie.

Conclusion

Analysis of the case scenario surrounding the transaction between Mr. Spoke and Wheelie clear reveals breach of the Australian Consumer laws and particularly the provision on representation of misleading or deceptive information prior to contract formation. In this case, Wheelie has a strong case against Mr. Spoke based on the misleading or deceptive information provision in contract formation. It is clear that Mr. Spoke represented false material facts about the business past and future profitability with the view to influence or entice Wheelie to purchase the business. In addition, there is substantive evidence that Wheelie relied on the false material facts to purchase the bicycle store. It is also clear that Mr. Spoke had the knowledge of the misrepresented facts as false because his intention was to dispose-off the business to get money to travel at whatever cost. Therefore, Wheelie should challenge Mr. Spokes actions as in breach of the common law and plead with the court to grant him the orders to rescind the contract and get his money back. In addition, the law also allows him to seek damages incurred for entering into the contract on the basis of misrepresentation of the business facts.

Bibliography

Bennett, Michael, ‘Breach repudiation and terminating a contract, Seven Wentworth Chambers, ‘< http://www.13wentworthselbornechambers.com.au/wp-content/uploads/2015/01/2012legalwisepaper.pdf>

Clarke, Graeme, ‘Misleading or deceptive conduct cases in the Supreme Court of Victoria,’ (11 September 2016), <http://barristers.com.au/wp-content/uploads/2014/11/Misleading-or-Deceptive-Conduct-Cases-in-the-Supreme-Court-of-Victoria-Paper-2.pdf>

Climpson, Stephen, ‘The impact of misleading and deceptive conduct on contracts for the sale of land, Australian Contract Law, Australian Consumer Law (Cth), Misleading and Deceptive Conduct,’ 2011<
http://www.australiancontractlaw.com/legislation/cthacl.html >

Commonwealth of Australia, ‘The Australian Consumer Law: A guide to provisions, (2010) < https://publications.qld.gov.au/dataset/1b96f0f9-1d84-44b4-9448-7d871dbd3b9d/resource/a9a1cc75-3b45-44fb-a08d-33d1e6ac7c10/download/aclguidetoprovisions.pdf>

Commonwealth of Australia, ‘The Australia Consumer law: A framework overview, (2013) <http://consumerlaw.gov.au/files/2015/06/ACL_framework_overview.pdf>

Campbell v Backoffice Investments Pty Ltd [2009] HCA 25

Esso Petroleum v Mardon [1976] QB 801

Quinlivan v Australian Competition and consumer commission

1Commonwealth of Australia, 2010, The Australian Consumer Law: A guide to provisions

3Climpson, Stephen 2011, The impact of misleading and deceptive conduct on contracts for the sale of land,

6Commonwealth of Australia, ‘The Australia Consumer law: A framework overview (2013)

7G, Clarke, Misleading or deceptive conduct cases in the Supreme Court of Victoria, (2014)

8 M, Bennett, ‘Breach repudiation and terminating a contract, Seven Wentworth Chambers (2012),

9S, Climpson, ‘The impact of misleading and deceptive conduct,’ (Online, 2011)

10Quinlivan v Australian Competition and consumer commission

11Campbell v Backoffice Investments Pty Ltd

12Holmes v Jones (1907) 4 CLR 1692

14Esso Petroleum v Mardon [1976] QB 801