With almost all sales of businesses, a vendor will endeavour to present the business in the most positive manner and as a consequence, will make certain representations in order to encourage a purchaser’s interest.

These representations may be oral or may be supported by written material such as financial statements and records and made by or on behalf of the vendor (eg. by a business agent engaged to sell the business). With the assistance of experienced advisors, both vendors and purchasers should seek to identify and agree upon what has been represented and/or relied upon, so that the essence of applicable representations may ultimately be incorporated in the sale agreement, usually in the form of ‘contractual warranties’.

Putting Things in Writing
From a legal point of view, it is far from satisfactory for vendors or purchasers to attempt to rely on representations which were made orally. It is preferable for all material representations inducing the purchaser to be incorporated in the contract as this will reduce the scope for disagreement regarding what was represented and on what material may a purchaser be legally entitled to rely upon for relief.

Drafting a list of comprehensive warranties for inclusion in a sale of business contract fundamentally protects buyers but it also assists vendors by limiting any claim by a purchaser to the matters warranted.

From a vendor’s perspective, it is of course important that all representations are both true and factual. It is neither prudent nor recommended for a vendor to make promises or forecasts as to the future, over which a vendor has no control.

At the outset, parties should advise their lawyers in detail as to all representations or statements which have been made by a vendor to a purchaser so that they can be included as warranties in the sale contract.

Remedies for Misrepresentation
A representation may be a term of the sale contract, thus the remedy for its breach may be contractual. Where a representation actually precedes a contract and acts as an inducement for a purchaser to sign a contract, there are remedies both under general law and under statutory law (i.e. Trade Practices Act and Fair Trading Acts in each State and Territory).

Warranties by Vendors
Commonly, contractual terms are classified into ‘conditions’ and ‘warranties’. As mentioned above, representations may constitute an inducement to enter into a contract and thus may also form a term of the contract. From a vendor’s perspective, rather than including representations in the sale agreement, it is safer for a vendor to give written warranties regarding certain existing facts or state of affairs (ie. past or present facts but not relating to the future).

From a drafting perspective, any promises of future conduct by a vendor (eg. to pay for the vendor’s stock at the appropriate time) should be by way of a covenant or promise rather than as a warranty.

Distinction between a Condition and a Warranty
In essence, a condition is a contractual term which, if it is not complied with, entitles the other party to treat the sale contract at an end. To the contrary, a warranty is a contractual term, a breach of which will entitle the other party to a claim for damages but does not terminate or entitle the other party to terminate the sale contract.

Vendors and purchasers need to ensure that a properly drafted sale contract is prepared by their respective lawyers which expressly specifies in the contract whether a particular contractual term is a condition (often called an essential term) or a warranty (often called a non-essential term).

Protective Provisions for a Vendor
From a vendor’s perspective, in an endeavour to minimise any claims of misrepresentation by a vendor, it is recommended that any sale contract expressly incorporates the following provisions:

  • that the sale contract contains the entire terms of the agreement between the vendor and purchaser;
  • that there are no warranties or representations which have been made by the vendor other than those expressly included in the sale contract;
  • that the purchaser has relied on its own skill judgement, inquiries and only those warranties contained in the sale agreement, in entering into such sale agreement;
  • that the purchaser has not relied on any representation or statement made by the vendor except for those expressly contained in the sale agreement.

There is no guarantee that the above provisions will successfully overcome any misrepresentation claims made by a purchaser but these provisions will still be valuable either from an evidentiary perspective (i.e.. as evidence of what the purchaser has or has not relied upon) or so as to exclude any contractually based claims.

Conclusion

In summary, given the exposure of significant contractual remedies if found to be incorrect, the issue of representations and warranties needs to be carefully considered both by vendors and purchasers and discussed with their respective legal advisers to ensure that they are appropriately and correctly addressed in the sale contract for a pharmacy business. Of course, this important process before contracts are signed is one which illustrates the invaluable benefits associated with a pharmacist engaging a legal advisor with extensive specific pharmacy industry experience, rather than hoping to manage by using the services of a lawyer without the necessary experience who proposes to simply ‘transact’ the sale or purchase.

Prepared by
Anthony Cannizzo
Partner
Robert James Lawyers
Level 10, 200 Queen Street
Melbourne 3000

Tel (03) 8628 2000
Fax (03) 8628 2050
Email: anthony@robertjames.com.au
Web site: www.robertjames.com.au