The Ontario Court of Appeal release a decision this past Monday regarding the sale of a business. In Kapuskasing Plumbing, the vendor and the purchaser were both franchisees of Culligan in different towns. The purchaser was interested in buying the vendor’s business (and thereby expanding the purchaser’s business and territory). After discussions, it was ultimately agreed that the business would be purchased for $1.6 Million of which $600,000 would be paid on closing and the remaining $1 Million to be paid over time through a consulting agreement.
While negotiations were ongoing for the purchase and before the agreement of purchase and sale was drafted, the President of the purchaser, Mr. Fortier, went on a walk-about through the vendor’s business with the President of the vendor, Mr. Villeneuve. At one point, Mr. Fortier asked Mr. Villeneuve how many 18 litre jugs of water the vendor sold in the prior year. Mr. Villeneuve looked out in the shop floor, counted the number of pallets, multiplied that by 20 working days per month, multiplied that by 12 months and came up with the number of approximately 200,000 as an annual number. As it turned out, Mr. Villeneuve’s “quick math” was more than double what the actual number was for the prior year. When the purchaser learned after closing that the actual number was closer to 95,000, it refused to pay any more money on the $1 Million consulting portion of the purchase price. The vendor sued for what was owed on the consulting portion and the purchaser counterclaimed for damages for misrepresentation on the sales figures. At trial, the judge found that there had been a misrepresentation and therefore dismissed the vendor’s claim and awarded damages to the purchaser of approximately $70,000. The vendor appealed and the Court of Appeal granted the appeal.
There are five elements to a claim for misrepresentation: (i) there must be a duty of care owed between the maker and the recipient of the statement; (ii) the statement must be untrue, inaccurate or misleading; (iii) the person who made the statement must have acted negligently; (iv) the recipient must have relied reasonably on the statement; and (v) there must have been some damage resulting from the reliance on the representation. The vendor agreed that four of the five elements were present for the purchaser, but it disagreed that the purchaser reasonably relied on the misrepresentation about sales volumes. The vendor showed that in pre-agreement discussions it had been stressed that the payment was to be without regard to sales volumes. Moreover, the evidence was that the purchaser asked for all of the accounting information - including sales figures – and that it could have been relatively easily figured out if one took the sales and divided by the known sales price per water jug.
Justice Armstrong agreed that there was no reasonable reliance on the statement of 200,000 jugs. He wrote:
In summary, the case comes down to this: Kapuskasing [the Vendor] refused to enter into a contract that was based on the number of bottles sold in the prior year. Mr. Fortier accepted that position and asked that he be supplied with documentation from which he could review the sales figures prior to signing the agreement and address any issues with Mr. Villeneuve. Mr. Fortier received the appropriate documentation and did nothing. If he had an issue in respect of his ability to calculate unit sales from the information provided, he could have raised it with Mr. Villeneuve or sought the assistance of Mr. Gravel [the purchaser's accountant and controller]. He did neither.
As a result, the Court found that the reliance upon the “quick math” and estimate of 200,000 was unreasonable and therefore there was no actionable misrepresentation. It further followed that the purchaser had no right to complain or to withhold payment under the consulting agreement.
While this case deals with the negotiations leading up to the signing of an agreement of purchase and sale to sell one’s business, the principle will be the same for any contract. If you are going to base your transaction upon a statement or an assumption – even if it is a shared assumption – then you had better get it included in writing in your contract. If you do that, then you can have a claim for breach of warranty of the contract. However, if you do not, then you cannot simply take any representation at pure face value. You have to ask for documents to support the assertions made in the statement that you intend to rely upon – which the purchaser did in this case. But then you have to actually look at what is given to you and ensure that what you have been sent is consistent with what you have been told – that is where the purchaser failed. The process is called “due diligence” not because it is a simple label for the process. You actually have to be diligent in your review of the facts or statements that underly your transaction. Failure to do so can prove to be costly later on.
Something to think about.