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By Selwyn Black, Esq. and Nicolas Huang, Esq.
Carroll & O’Dea Lawyers
Sydney, Australia

The recent case of Kallin Pty Ltd v ACN 107 851 847 Pty Ltd [2018] NSWSC 124 highlights the importance of buyer due diligence in making acquisitions and the need for a carefully tailored sale contract.

The Key Facts

  1. Good Booze (Seller) owned a liquor store (Store). David Short (David) and other members of the Short family were the shareholders of the Seller. The Short family owned other interests in pubs and clubs, and operated a wholesale liquor business.
  2. Kallin Pty Ltd (Buyer) is associated with Steven Chambers (Steven) who, together with other associated companies, operated a chain of retail liquor stores.
  3. Good Booze was looking to sell the Store and engaged a business agent. The agent prepared an ad with sales figures and a $980,000 asking price.
  4. The business agent contacted Steven. Steven advised he was not interested at that price because he had heard from the industry that the Store’s sales figures were inflated with wholesale sales.
  5. David offered to sell to Steven for $800,000. Steven said he was not interested at that price but would pay $600,000.
  6. Steven said this low offer was made to get rid of the deal. Steven’s in house accountant was against the purchase because of the rumours about wholesale sales.
  7. The judge found that a conversation took place between David and Steven in which Steven had asked David whether the Store supplied the Keystone bar chain (a chain the Short family had an interest in). David replied that it did not.
  8. Coles supermarket offered to buy the Store for $600,000. David offered to sell to Steven for $640,000. Steven accepted that offer.
  9. The sale contract contained a provision (Provision) stating that the Buyer had full opportunity to inspect the books of the Seller, and that the Seller gave no warranty about takings or outgoings other than that the books were true and correct.
  10. The Store did not perform in line with Steven’s expectations.

 

The Issue

  1. The Buyer:

(a)            claimed that it was induced into entering the sale agreement by the misleading and deceptive conduct of the Seller and David in providing the Buyer with misinformation as to wholesale sales. The Buyer wanted the sale contract to be rescinded; and

(b)            claimed damages for breach of the Provision by the Seller.

The Decision

  1. The judge found in favour of the Seller:

(a)            David gave misleading information to Steven when he stated that the Store did not supply the Keystone chain. While this statement was literally true, it was misleading because the crux of Steven’s enquiry was whether the Store supplied any business connected to the Short family, not just the Keystone chain. The Store did supply other businesses connected with the Short family.

(b)            However the misleading and deceptive conduct did not play a causative role in Steven’s decision to buy the Store. Steven was not actually misled by David’s conduct because Steven did not rely on David or believe his statements in relation to wholesale sales. When Steven initially rejected the chance to buy the Store, he followed his accountant’s advice that wholesale sales were included in the Store’s sale figures. The reason Steven bought the Store was because Coles had made an offer, and Steven had an opportunity to buy at a bargain price.

(c)             The claim in relation to the breach of the Provision failed because the Buyer could not establish any breach of warranty (the books were in fact true and correct) and it could not prove any loss.

Conclusion

Due diligence is an important process for any buyer of a business. It would have been prudent for the Buyer to obtain more information about the Seller’s sales and other figures prior to making the purchase, for example a more detailed breakdown of sales and review.

Appropriate contract drafting is also important. If an issue is a major concern to the Buyer, a warranty should be sought.   Also, thought should be given up front as to how loss may be proved if the warranty is breached.