Breach to their own: Misleading and deceptive conduct in sale of business negotiations

03 November 2023

This case deals with the evaluation of evidence and the assessment of damages in a breach of contract claim related to the sale of a business.

In issue

  • Damages for the sale of a café business induced by misleading or deceptive conduct.
  • How damages for the breach of business sale contract are to be assessed.

The background

H&Q Café Pty Ltd (H&Q) entered into a contract with Melbourne Café Pty Ltd (Melbourne Café) for the former to purchase a café business which operated from leased premises at the Royal Children’s Hospital.

H&Q commenced proceedings in the County Court in which it sought damages for breach of contract from Melbourne Café which included the purchase price for the business, together with lost profits, trading losses and interest on a loan used to fund the purchase.

H&Q alleged Melbourne Café and/or its director, Jiang Zhang, had:

  1. engaged in misleading and deceptive conduct contravening s 18 of the Australian Consumer Law; and/or
  2. breached a term of the contract by which it warranted that information about the business provided to H&Q was true and correct.

In a nutshell, H&Q alleged the business had actually been unprofitable in the years leading up to its purchase and that Melbourne Cafe had, by providing false financial material to H&Q, misled it as to the true financial position of the business.

H&Q relied on financial documents which it subsequently obtained that, in its submission, painted a contrasting picture of the profitability of the business to that contained in the material provided by Melbourne Café during negotiations leading up to the sale.

The decision at trial

At first instance, the trial judge found both Zhang on behalf of Melbourne Café and Xin Qiu on behalf of H&Q were unreliable witnesses. Nevertheless, the trial judge was satisfied Zhang (and, therefore, Melbourne Café) had provided false information to H&Q prior to the sale and engaged in misleading or deceptive conduct. The trial judge also concluded this conduct amounted to a breach of contractual warranty and that the conduct caused H&Q to enter the contract for the sale of the business.

Notwithstanding these conclusions, the trial judge was not satisfied that H&Q had established any loss as a result of Zhang’s or Melbourne Café’s conduct. As such, H&Q was awarded damages for breach of contractual warranty in the nominal sum of $100.

When assessing damages, the trial judge rejected H&Q's claim for operational losses and interest on a loan due to insufficient evidence and credibility issues. The claim for loss on the purchase of the business was also denied by the trial judge because of a perceived lack of clear proof regarding the business's true value at the time of acquisition.

The issues on appeal

H&Q appealed the judgment insofar as it related to the assessment of damages.

The grounds of appeal included the failure to correctly quantify H&Q's loss and damage, the trial judge's conclusion of no or nominal loss being contrary to compelling inferences, and errors in the treatment of Ms Qiu's evidence.

The decision on appeal

The Court of Appeal determined the trial judge erred in finding that H&Q had not established its loss on the purchase of the business. Leave to appeal was granted and the appeal was ultimately allowed.

The Court of Appeal assessed the damages caused by the conduct of Zhang and/or Melbourne Café at $2,150,000. This figure was based on the difference between the purchase price ($2.4million) and the true or real value of the business at the time of purchase ($250,000). The trial judge wrongly regarded the insufficiency of the evidence of trading losses after acquisition as fatal to assessing the loss occasioned by the sale.

The question for determination was whether H&Q had more probably than not proved a loss in accordance with the rule in Potts v Miller (being the difference between the price paid and real or true value) on its purchase of the business.

The Court of Appeal pointed out that courts will often be presented with conflicting expert evidence as to the value of an asset acquired. In such cases, the court must ‘form and act on its own original opinion, taking such assistance as it can from the opinion of experts’. The trial judge must subject the competing valuations to critical evaluation and should accept the evidence which best stands up to that critical scrutiny.

Implications for you

This case emphasises the importance of a thorough and balanced assessment of evidence when determining business value at the time of sale and establishing losses in these types of claims. It also highlights the importance of focusing on the "true value" of an asset at the time of acquisition, and the challenges in assessing business value due to inaccuracies and the destruction of source material.

Parties should always be mindful to make full disclosure during pre-contractual negotiations, as a failure to do so may result in a breach of contract claim.

Further, as is often the case when contractual relationships sour and court proceedings ensue, credibility of witnesses is of critical importance, although a Court will make findings based on the totality of the available evidence when considered alongside the credibility of the various witnesses.

H & Q Café Pty Ltd v Melbourne Café Pty Ltd [2023] VSCA 200

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