19 August 2005
Melbourne, 19 August 2005: A leading corporate lawyer has issued a warning to prospective business owners, particularly franchisees, to make sure they've done their homework thoroughly before signing a contract - because they might not be able to rely on the law to help them out if the deal goes wrong.
Nick Miller, a corporate partner at Clayton Utz in Melbourne, said that while purchasers of businesses or property had tended in the past to rely on alleging misleading and deceptive conduct by a vendor in breach of s52 of the Trade Practices Act - traditionally viewed by the courts as a consumer protection provision - to give them a remedy, some recent court cases suggest this comfort can't be taken for granted.
This is highlighted by a recent decision of the Full Federal Court in Poulet Frais v The Silver Fox which concerned alleged misleading and deceptive conduct on the part of the franchisor in relation to representations made to the franchisee as to the likely turnover of a Lenard's Poultry franchise store. In that case, the franchisee was unable to rely on the alleged representations as the court found that "no reasonable person who had read and considered the whole of the material provided … could have been under any illusion that … any particular weekly level of gross sales would be achieved ..".
This decision is one of the latest in a series of cases over the last 12 months where the courts have held variously that a purchaser could or could not rely on s52 depending on the facts of the case.
Mr Miller said the decisions underlined the importance for purchasers - not just of businesses but of any assets - of ensuring they have a clear idea of what business fundamentals they are relying on before entering into a commercial arrangement. "Those key fundamentals, or assumptions crucial to the success of their new business, should either be independently verified or the purchaser should be sure it can clearly rely on the vendor's statements," Mr Miller said.
He added: "With the economy cooling, there is the likelihood that we may see a rush of cases as aggrieved purchasers look to s52 to give them a remedy. However what is clear from recent court cases is that each case will depend on the particular facts."
Mr Miller said that the recent attitude of the courts to s52 suggests the need for increased vigilance particularly in relation to oral or written representations made in relation to the subject matter of the sale. "Particularly for purchasers, it's unclear that the courts will come to your aid by a favourable reading of s52."
On the flipside, the message for vendors is that with a well-advised and cautious approach to negotiations and documentation, they can go a long way towards protecting themselves from the likelihood of a successful claim under s52.
"In the Silverfox case, for example, the court noted that "the existence of an exclusion or qualification clause is relevant to a determination of whether an applicant has established reliance". The Court went on to say that in the circumstances of the case "the suggestion of any reliance on profitability assessments is quite inconsistent with the applicant's numerous written acknowledgements to the contrary," Mr Miller said.
