The Story of a Café and a Mispresentation
The recent case of Do Yay Limited (in Liquidation) (formerly known as Café Brioche Limited) v Yuen Fei Wei and Lodge Food Limited (“the Brioche Case”) is an example of how important it is that vendors represent turnover figures accurately or put themselves at risk of a claim of damages by purchasers.
Under section 35 of the Contract and Commercial Law Act 2017 (CCLA) if a party has been induced to enter into a contract by a misrepresentation (whether innocent or fraudulent) that party is entitled to damages from the person making the misrepresentation to the same manner and to the same extent as if the representation were a term of the contract that has been breached.
In the Brioche Case, the purchaser was awarded $272,574 in damages after the judge ruled that the vendor had breached s 35 of the CCLA for pre-contractual misrepresentation.
The background to this case is that in August 2015 the vendor advertised the Café Brioche Takapuna Business for sale. The asking price for the business was $220,000 plus stock and the advertisement stated “The Café has strong weekly sales of over $9,000 per week...”. The Purchaser’s director, Mr Wei, then met with the vendor’s business broking agent where he was informed that the weekly turnover had reduced from $9,000 to $6,500 due to the construction on an adjacent parking lot. After further discussion with the broking agent, Mr Wei was sent financial information about the business. On 2 October 2015 Mr Wei signed a conditional sale and purchase agreement for the business for $115,100 with settlement occurring on 14 December 2015 after a due diligence period. Following settlement, Mr Wei found further sales data indicating actual sales records which showed the actual weekly turnover was lower than represented. The business did not perform to Mr Wei’s expectation and the business ended up running at a loss, eventually being sold to a third party in August 2016 for $92,000.
For a statement to be a misrepresentation it must relate to an existing or past fact. Mr Wei was told that weekly turnover had reduced to $6,500, but he was also told that this reduction from $9,000 was due to the construction work. The issue that the judge faced is what implication that explanation to Mr Wei carried. Mr Wei could not guarantee that sales would be revived to $9,000 a week once construction had been completed. This is because the past performance of the business is no guarantee of future performance. The judge, therefore, ruled that a statement that turnover would improve once construction was complete would be an opinion and not a representation of past or present fact. This meant that it could not be a misrepresentation.
However, the representation that turnover had reduced to $6,500 per week was a representation of fact and therefore it was reasonable for Mr Wei to rely upon it. The evidence showed that turnover in 2015 was in fact less than the $6,500 as represented. The actual turnover was an average weekly sales figure of $5,127.77. The judge considered that actual sales of approximately 79 per cent of what was represented is a sufficiently substantial discrepancy in the circumstances for there to be a misrepresentation.
Now that there was a misrepresentation the next step was for Mr Wei to show that the misrepresentation induced him to enter into the contract. The law is that there can be no inducement unless the representor intended such a result, or wilfully used language which would induce a normal person. In this case the judge did not need to know the Vendor’s actual intention as the misrepresentation that weekly sales had reduced to $6,500 and the subsequent false sales figures that were provided amounted to the wilful use of language which would induce a normal person.
It was also necessary for Mr Wei to establish that a reasonable person would have relied on the misrepresentation. In this case the judge ruled that it was reasonable for Mr Wei to have relied on the misrepresentation. The judge concluded that the Vendor misrepresented the turnover of the business, that Mr Wei was subsequently induced to enter the sale and purchase agreement and further, that if Mr Wei had been aware of the true position of the business, the evidence suggested that he would not have entered into the agreement to purchase Café Brioche.
As a result of being induced into buying Café Brioche as a result of the misrepresentations, Mr Wei was entitled to expectation damages which is aimed at putting the plaintiff in the position he or she would have been in had the contract been performed. The judge ruled expectation damages to be $206,942 for loss of value of business and $65,632 for trading losses for total damages of $272,574.
The moral of this story is that vendors and their agents need to be vigilant to ensure that any statement they make about the current and existing performance of the business can be backed up with evidence.
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