Abdul Mabud Masum
- Mr Bernard Burgess, who ran a family bakery business at Portsmouth in Hampshire, had a conversation with Mr Arthur Albertson at the bowls club, selling his family business. Mr Albertson was impressed, and showed interest in buying it; especially offer Mr Burgess explained that the turnover of the business was about $400,000 per year and that the profit was 20% of turnover with $80,000 annual profit. On 1st March 2003, Mr Albertson and his wife Alice went to see Burgess at his bakery and were satisfied with overall set up of the company. Later, Mr Burgess confirmed the annual profit and turnover from the accountant report and gave him a copy of the accounts for the last year to check it before committing himself by an independent account. On trust Mr Albertson signed the agreement to buy the shares for $150,000 on 7th March 2003. Since then Mr Albertson has run the business and it becomes apparent to him that they were not achieving a turnover anywhere near $400,000 per year. Therefore, he engaged a large accountants firm, to check the old accounts, who confirmed him the real turnover was about $260,000 per year, and profits were about 15% of that- i.e. about $40,000. By the time the staff wages were paid there was only about $10,000 left. He later realised that Mr Burgess lied about everything to deceive him fraudulently.
2. I am asked to advise Mr Albertson as to whether he can rescind his contract to purchase the company; and in case he cannot, to advise in the alternative on the quantum of damages.
Summary of Advice:
- In my opinion it is likely that Mr Albertson would have a good claim in contract and in tort recovering damages against Mr Burgess, but would be very difficult to rescind his contract to purchase the company. His claim against Mr Burgess due to misrepresentation will have a greater prospect of success both in contract and in tort especially under the Misrepresentation Act 1967, s 2 (1). There are six causes of action, those are either contractual or tortious actions, available with regard to misrepresentation. Furthermore, the cause of action in this case, I think will be stronger and persuasive both breach of collateral warranty in contract and tort in negligence and under the Misrepresentation Act 1967, s 2 (1). The damages in my opinion Mr Albertson will likely to recover in contract either $70,000 or $90,000 and in tort either $75,000 or 105,000.
4. It is clear that Mr Burgess, will be held liable, having made false representation to Mr Albertson who has then acted to his detriment in reliance upon that representation. It means he has entered into a contract with Mr Burgess due to misrepresentation.
5. Mr Albertson had agreed to buy a bakery shop from Mr Burgess for $ 150,000, considering the information provided by both Mr Burgess and the company books that the business turnover was about $400,000 per year and that the profit was about 20% of turnover. He then signed the written agreement on the same terms at Burgess’s solicitor’s office on Friday 7th March 2003, although they did not actually exchange money and share certificate until 4th April 2003.
6. Once the court is satisfied that there was a contract between the parties, will highly likely to consider that Mr Burgess in fact made the statements either orally or in writing will be incorporated with the express terms of the contract. However, there is an express statement by Mr Burgess that the business turnover is about $400,000 per year and the profit is about 20% of turnover. I need further information regarding both the telephone conversation between the parties and the drafts of the agreement to advise on whether the statements incorporated with the terms of the contract and the parties agreed on any specific terms to act upon. I think that Mr Burgess had made the statement with special knowledge as compared with Mr Albertson. Therefore, the court will be more willing to infer an intention to make the statement a term of the contract. Such was the position in Birch v. Paramount Estates Ltd (1956) 168 Estates Gazette 396. Mr Burgess on the other hand might argue that the statements are mere representation and they don’t form part of the contract so the statements should be ineffective.
7. The court is likely to find Mr Burgess liable for the breach of contract due to the misrepresentation. As Mr Albertson engaged a large firm of accountants to check the old Burgess’s accounts, they very quickly reported back that the accounts were ‘very shoddily prepared’ and even had basic mistake in the arithmetic. The first is the turnover figure in the Cyril Curtis audited accounts of over $400,000, is only used to persuade Mr Albertson to enter into the contract, which is an untrue statement because the true figure is $261,849 and is such a drastic increase on the previous year’s figure that it only designed to misrepresent the statements. The next increase in gross profit (from $71,481 to $104,552) as the first digit of the ‘Raw Materials’ has been copied wrongly whereas the true position was a decline in gross profit to $63,133.
8. The net profit indicated in the original report was 20%, this is in fact only 15.4%, by incorrectly added up the administrative expenses and incorrect gross profit. The next error perpetrated in the calculation of the figure described as ‘pre-tax balance’. In subtracting the figure of $38,116 (for wages and fees etc) from the ‘net profit’ figure of $80,667, the amount is $4,255 instead of $42,551, presumably because the person preparing the account was looking for a modest increase in that figure, compared with the previous year, instead of an extraordinary one. Therefore, these are simply misrepresentations that are untrue are statements of fact made by Mr Burgess to the contract with Mr Albertson which are the main reasons that persuades Mr Albertson to enter into the contract. Clearly, Mr Albertson has altered his position on the faith of the representation so the mere fact of its falsehood entitles him to certain remedies.
9. The misrepresentation of the statements by Mr Burgess that ‘the turnover of the business was about $400,000 per year and that the profit was about 20% of turnover’ was made fraudulently therefore is a tortious action in deceit. I need further information to advise on deceit about both his knowledge of the false statements and clear evidence of deceit. Otherwise I will be in breach of professional conduct point if I continue to advise on deceit, although I have considered fraud in my advice for better understanding the issue. In fact, he must have made the statements knowing it to be false, or not believing it to be true, or with reckless dishonesty, not caring whether it was true or false. Clearly, it seems a fraud, takes place will be sufficient to find Mr Burgess responsible, will be established so it is immaterial that there was no intention to cheat or injure Mr Albertson to whom the false statements were made. Again, I need further clear evidence to advise on fraud, for example, whether there is any terms in the agreement when constitute misrepresentation which mislead Mr Albertson to enter into the contract It can be proved that Mr Albertson has very good evidence as he has acted in reliance upon the representation.
10. Mr Burgess on the other hand might argue that he honestly believed his statements to be true as auditor provided the statements, he cannot be liable in deceit, no matter how ill advised, stupid, credulous or even negligent he may have been. In my opinion, this is not sufficient to escape his liability because there is clear evidence, which infers he knew what was going on. Firstly, his employee Mrs Edna told Mr Albertson, ‘that nothing had really changed since we took over, but the real turnover was about $260,000 per year, and profits were about 15% of that –i.e. about $40,000’. In fact, it is obvious that Mr Burgess knew the correct figures of the statements otherwise his employee wouldn’t have known it. I need further information on the reliability of Mrs Edna’s statement. Secondly, it seems that he was tricked into believing on other person was interested in buying the bakery, who made the offer of $145,000. Which persuaded Mr Albertson to enter into the contract and in the same time Mr Burgess was in a hurry to sell the bakery. I need further information, if its possible, on whether the second buyer was really offered the mentioned price or he just made up the price to mislead Mr Albertson. Furthermore, I think that the representation was made by Mr Burgess was not only untrue to his knowledge but also an intention that it shall be acted upon by Mr. Albertson.
11. It will be more appropriate to say that Mr Burgess had made the statements negligently which can be a tortious action under the Misrepresentation Act 1967, S 2(1). Clearly, Mr Albertson can show that the representation was false, that he entered into the contract in reliance on it, and that he suffered loss thereby. Section 2(1) provides that: Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true. Following, the statute imposes an absolute obligation on Mr Burgess not to make representations, which he cannot prove that he had reasonable grounds to believe, and not merely a duty of care to avoid untrue representations, which could be discharged by the exercise of reasonable care in all the circumstances surrounding the making of the representation.
12. Mr Burgess could argue that Mr Albertson is contributory negligent as he advised him to check the books by an independent accountant before committing himself. Therefore, if Mr Albertson had done that he could have discovered the falsity of the representation and could reasonably have been expected to do so. However, there is no defence for both fraudulent misrepresentation and breach of contract, and where a claim is made under MA 1967, s 2 (1). In negligence, at common law, contributory negligence will be in principle available as a defence only where it would be reasonably foreseeable that Mr Albertson would rely on Mr Burgess’s statement, and it would be odd in such circumstances to hold that Mr Albertson was at fault in relying upon it. Following, in my opinion neither in tort nor in contract damages under both heads would be reduced for Mr Albertson’s contributory negligence.
13. The remedy will be discussed into two parts a) Rescission b) Damages
14. It is highly unlikely in my opinion that Mr Albertson would be able to rescind his contract to purchase the company due to misrepresentation. Rescission is an equitable remedy whereby a contract made between two parties is set aside, and they are restored to the position they would have been in had the contract never been made. The contract is in effect voidable: valid until it is rescinded, and thereafter treated as if it had never taken effect. On discovering the misrepresentation Mr Albertson could elect either to affirm or to rescind the contract. A contract would be considered rescinded if he were made it clear that he would have refused to be bound by its provisions. The effect then would be that the contract would have terminated ab initio as if it had never existed. However, the general rule is that within a reasonable time he must have communicated his decision to Mr Burgess, for the latter is entitled to treat the contractual nexus as continuing until he is informed of its termination.
15. I think the court would consider that Mr Albertson, with knowledge of his right to rescind, had affirmed the contract because he replaced the ovens after discovering the truth, his right to rescind is waived. He therefore affirms the contract by conduct, for example, by continuing bakery business, which would suggest an intention not to rescind or seek rescission. This means not only that Mr Albertson was aware of the facts of which he was previously unaware (for example, that Mr Burgess’s representation was false), but that he was also be aware of his legal rights and his option to rescind. Furthermore, he failed to give notice of rescission within a reasonable time after discovering the truth may amount to affirmation. I need further information about the time difference between discovering the truth and replacing the ovens, and whether any communication takes place to rescind the contract with Mr Burgess
16. Arguably, delay between discovery of the truth and seeking to rescind would also evidence affirmation that he never communicated to Mr Burgess for an intention to rescind the contract. However, delay between the dates of the contract and seeking rescission would amount to a bar in itself, even where there is no question of affirmation.
17. It will be necessary to decide upon what principles damages are to be assessed. It appears not improbable that different rules apply to each of the possible heads of claim and it is therefore necessary to consider damages in contract and damages in tort separately.
Damages in Contract:
18. Mr Albertson would be able to recover damages for loss of bargain and any consequential loss, but not the contract price. Damages for loss of bargain would be the difference between what was promised and what was actually received. Therefore, he would likely to be compensated for either $70,000 or $90,000. It seems that the breach of contract consists of the representation being false, then damages are designed to put him into the position in which he would have been had the representation been true.
Damages in Tort:
19. The courts will likely to assume in the tortious damages that Mr Albertson would not have entered into the contract due to misrepresentation, and so damages will put him into the position in which he would have been had the contract never been made. Therefore, he can recover the contract price and any consequential loss, but not loss of bargain, the profit he would have made on the contract if the misrepresentation had been true. From the contract price must be deducted the value of the property he has received under the contract. The damages are the difference between what he paid, and the value of what he received. That value may often need to be taken as the value now, rather than the value at the time of receipt. Therefore Mr Albertson would be able to recover either $75,000 or $105,000.
Further Evidence and Next steps:
20. The damages that I have figures for total both in contract either $70,000 or $90,000 and in tort either $75,000 or $105,000. However, it is highly unlikely that Mr Albertson will be able to rescind his contract to purchase the company due to misrepresentation as the contract was affirmed. However, this claim is suitable for the fast track.
- A letter before claim should be sent Mr Burgess, setting out the bases of claim and the alternative amounts sought. If the defendants do not settle, this claim should be brought in the High court.
Abdul Mabud Masum
19 November 2003.