Case Study 1: Adam Wants To Sell His Flower Shop Business

Case Study 1 10 Marksadam Wants To Sell His Flower Shop Business To

Adam intends to sell his flower shop to Eve, claiming that the business has an annual turnover of approximately $600,000, supported by some monthly receipts indicating about $50,000 on average. However, Adam neglected to disclose that during three winter months, the shop's turnover drops to around $30,000 per month. Consequently, the actual annual turnover is closer to $540,000. Based on Adam’s representations, Eve purchased the business, believing she could improve its performance and double its sales.

Shortly after the acquisition, Eve realized that the business's actual turnover was much lower than claimed, rendering it barely profitable enough to cover overheads, and not achieving the expectations set by Adam’s claims. This raises questions about her legal rights and potential remedies under common law. Specifically, whether Eve has any claim against Adam for misrepresentation or other grounds, and whether her rights would differ if she had asked Adam for the exact turnover figures before purchasing.

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Under Australian law, the primary legal issue in this scenario revolves around misrepresentation and whether Eve can seek remedies such as rescission or damages. The law on misrepresentation under the Australian Consumer Law (ACL) and the general principles of contract law inform on this matter. Misrepresentation involves a false statement of fact made by one party to another, leading the latter to enter into a contract they otherwise would not have.

In this case, Adam's assertion that the business had a $600,000 turnover, supported by some monthly receipts, appears to be an untrue statement because he intentionally concealed the seasonal downturns during winter months. The fact that Adam did not mention the seasonal variation constitutes a misrepresentation by omission, and if proven that Adam knowingly failed to disclose material facts, this could amount to fraudulent misrepresentation, giving Eve grounds to rescind the contract and claim damages.

The key case law relevant here includes Carney v Farquhar (1981), which clarified the scope of misrepresentation and the importance of causation. Also, Cooke v Pan Australian Petroleum NL established that a misrepresentation, whether fraudulent or innocent, that induces a party to contract, affords grounds for rescission. Furthermore, under the ACL, section 18 and 29, false or misleading representations are prohibited, and remedies include rescission and damages.

In the scenario, because Adam's claim appears to be false, and that Eve relied upon it in good faith, she might be entitled to rescind the sale. Rescission effectively nullifies the contract, restoring both parties to their pre-contractual position. Additionally, Eve could claim damages for any loss suffered, which would cover her reliance on Adam’s misrepresentations as per common law principles exemplified in Johnson v. Margereson (1970).

However, the fact that Adam did not explicitly state the exact annual turnover complicates the analysis. If Eve had explicitly asked for the exact turnover figure, and Adam refused or was evasive, her case for misrepresentation would be stronger. According to Fitzpatrick et al. (2014), in situations where a seller actively conceals inaccuracies, the misrepresentation is more evident, bolstering her right to rescind or claim damages.

In terms of remedies, Eve could pursue rescission under common law and the ACL. Rescission, however, is generally available only if the misrepresentation was material, and she acted promptly upon discovering the falsehood. If the contract has been executed and the misrepresentation is deemed fraudulent, damages equivalent to the loss suffered can be awarded.

In conclusion, Eve’s rights against Adam likely include rescission of the contract and possibly damages under Australian law, provided she can establish the misrepresentation was material and caused her to enter the agreement. If Eve had inquired explicitly about the turnover and Adam concealed or lied about it, her case for misrepresentation would be even stronger, with clearer grounds for remedies.

References

• Fitzpatrick, J., Symes, C., & Veijanovski, A. (2014). Business and Corporations Law. LexisNexis.
• Carney v Farquhar (1981) 148 CLR 56.
• Cooke v Pan Australian Petroleum NL (1991) 171 CLR 558.
• Johnson v Margereson (1970) 122 CLR 568.
• Australian Consumer Law (Cth) Sch 2 to the Competition and Consumer Act 2010 (Cth).
• Funnell v Stewart (1917) 23 CLR 440.
• Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.
• Commercial and Consumer Law Principles, Law Reform Commission of Australia, 2010.
• Bell v Lever Brothers Ltd [1932] AC 161.
• Prestidge v Commonwealth Bank of Australia (1999) 197 CLR 22.