In brief

The sale of a Subway store turned litigious in the recent case of Shah v Hagemarad [2018] FCA 91 where the defendants misrepresented the sales when selling their business in order to achieve a higher sale price.  The Court disregarded the terms of the contract, looking behind it and ordering the sellers to pay the difference between the purchase price and true value of the business.

What you need to know

  •  Regardless of the terms of the Contract you may still be liable for any misleading and deceptive conduct you engage in to induce someone to enter the contract.
  • When selling a business, ensure that you can evidence any figures you provide to a purchaser with documents.

The facts

 The relevant facts of the case are as follows:

  • Mr Shah owned 3 Subway franchises and was looking to buy a fourth.
  • When inquiring into a franchise business for sale, Mr Shah was provided with a number of documents including average weekly and monthly sales.
  • Mr Shah verified the numbers as best he could by spending 2 days observing the customers of the Subway store from across the street.
  • The Agreement to purchase the business contained clauses to the effect of:
    • The buyer enters into this agreement solely as a result of their own due diligence.
    • Any representation not warranted in this Agreement is withdrawn and the parties release each other from all claims in respect of any representation not warranted in this Agreement.
    • The buyers will not bring a claim unless based solely on and limited to the express provisions of the Agreement.
    • There was some discrepancy in the sales figures provided and some reference to “fake sales”.

Mr Shah’s arguments

 The business averaged less than $12,000 weekly when he believed the sales figures were between $15,000 – $16,000.

  • Mr Hagemrad and Mr Allouche (the Sellers) created a large number of fake sales to obtain a higher price for the business.
  • He would never have bought the business had he known the true sales figures.

The Seller’s arguments

  •  Only one of the Sellers of the Subway business appeared at the trial.
  • This Seller claimed that the other Seller had stolen money from the business by recording cash sales and credit sales and keeping the cash for himself.
  • There was a decline in the business due to the relocation of a bus stop, light rail works, the removal of outdoor seating and the failure to take advantage of catering opportunities.

The Court’s findings

 The Court found as follows:

  • The Sellers sold the business when it was having cash flow problems and poor trading performance.
  • The Sellers were “creating” sales in order to inflate the sale price of the business.
  • Mr Shah would never have agreed to purchase the business if he knew of the fake sales.
  • Regardless of the terms of the contract, the Sellers misrepresented sales in circumstances where they knew the documents were likely to be relied upon by Mr Shah to purchase the business.
  • The Sellers were to pay Mr Shah $300,000 being the difference between the purchase price of the business ($460,000) and the true value of the business ($160,000).

Conclusion

The Courts are showing a willingness to look behind a contract when they believe false or misleading information was provided to induce a sale. It is very important when providing any documents to the purchaser when selling a business, that these documents can be supported by evidence verifying their accuracy.

About the Author

Catherine Ballantyne

Partner
A business disputes specialist, Catherine is a trusted advisor to businesses and individuals in obtaining successful outcomes. Businesses rely on Catherine as a trusted advisor as well as lawyer in guiding them through complex litigation and disputes.

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