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Warranties, Representations

& IndemnitiesOf Buying a Business

Presenter: Steve BrownB.Ec, LL.B (Syd), M.App.Fin (Mac), A.Bus, FAICD


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Topics

Issues to Consider Pre-contractual representations

Specific Contractual Terms & Conditions

Negotiation of Contract warranties etc


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Formalities and terms

Terms of a

contractexpressimpliedconditionswarranties


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Taking Instructions Find out what it is that the client wants. It

is trite just to say a vendor wants a saleand a purchaser to purchase a business

Lawyers role is to facilitate the successfulachievement of our clients goals in other

words to ensure performance but of what! Of what is the aim of taking instructions.


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Taking Instructions Checklists are a useful tool to obtaining

proper instructions

Checklists minimise a lawyers exposure toprofessional negligence claims

Only every act for one party

Work with clients accountant regarding taxstructure issues on sales and purchases


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Issues to Consider - Vendors Should the vendor obtain a guarantee for

performance of a corporate

purchaser(Swept-Up Marketing Pty Ltd v Voltrant No. 282 Ltd (NSW)Supreme Court, 26 April 1989, )

Indemnity


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Issues to consider - Purchaser1. Does the purchaser have the finance

2. Does the purchaser have the capacity torun the business

3. Determine the legal structure for thepurchaser by considering:


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i. the simplicity of the vehicle and its cost ofestablishment;

ii. the nature and size of the business;iii. the potential for the growth of the business and

the need for additional capital for growth;

iv. the taxation consequences of each vehicle;v. the manner in which the business is to be

managed and the degree of owner involvement;vi. the cost and complexity of terminating the vehicle

on the owner exiting the business or passing it onto their family;vii.the structure of the purchasers family; andviii.the potential for the business to fail and the

implications if it does fail.


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Negotiation Issues Pre-

contractual representations Negotiating What to Look Out ForStatutory

Impact on Contract Law

Misleading or deceptive conduct Trade practices act (Cth) ss 52 & 53

Fair trading act (NSW) s. 42

Unconscionable conduct

Trade practices act (Cth) pt IVA Fair trading act s. 43

Contracts Review Act (NSW only)


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Misleading or DeceptiveMisleading or Deceptive

ConductConduct

Misleading or DeceptiveMisleading or Deceptive

ConductConduct Strict liability

Actual deception Overall

impression

Product puff

Silence

AmbiguityErroneous

assumption

Half truths


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Four principles were established in the case ofTaco Coof Australia v Taco Bell Pty Ltd (1982) ATPR 40-303 asassisting to determine whether conduct is misleading ordeceptive.

1. The relevant section of the public must be identified.2. All people within that section must be consideredincluding the intelligent and not so intelligent, theeducated and uneducated.

3. Evidence that someone was misled is helpful, but is

neither conclusive nor essential.4. When a misconception has arisen it is important todetermine why, in order to see if it was the business'conduct that caused it.

Misleading conduct - s 52 Example


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A SECOND PRINCIPLE:

It's the overall impression on the targetaudience that counts

silence can be misleading - if

there is a duty to speak

a prediction can be misleading -if there's no reasonable ground

to make it

Misleading conductMisleading conduct -- s 52s 52


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The Difference BetweenThe Difference Between

Agreements and Contracts?Agreements and Contracts?

Agreements are not as a

general rule:

Legally enforceable

Courts will not involvethemselves.


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The Difference BetweenThe Difference Between

Agreements and Contracts?Agreements and Contracts?

Contracts are ALWAYS:

Legally enforceable

Courts will enforce as the

law dictates


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Non Enforceable AgreementNon Enforceable AgreementIf you wash my carIll give you $10


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Non Enforceable AgreementNon Enforceable AgreementIll pick you up for

dinner at 8 oclock


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Contracts & Agreements what

are they?

Contracts & Agreements what

are they?Practical Answer they are both

Risk Minimization tools that operateasChecklists or Rule Books by applying

Performance standards


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Contracts & AgreementsContracts & Agreements HowHow

Are TheyAre They Risk ToolsRisk Tools

Contracts & AgreementsContracts & Agreements HowHow

Are TheyAre They Risk ToolsRisk Tools

Contract or agreement tosell a toll manufacturingbusiness

Agreement to meet and discuss a

form of long term supplyarrangementContract to supply anapple


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Contracts & AgreementContracts & Agreement -- AsAs

Checklists or Rule BooksChecklists or Rule Books

Contracts & AgreementContracts & Agreement -- AsAs

Checklists or Rule BooksChecklists or Rule Books Who is to do what who is to sell; Who is

purchase (whatever it is that is being sold).

When are the services\goods to be suppliedby vendor when are they to be paid for bypurchaser.

How are the services\goods to be supplied.

Consequences of good or poor performance.


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Why have a Contract instead ofWhy have a Contract instead of

an Agreementan Agreement

Why have a Contract instead ofWhy have a Contract instead of

an Agreementan Agreement

least formal to most formal form

form of Agreement oral contract of written

contract

RiskRisk

Formality &Formality &

LegalityLegality


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Contracts as risk tools are used to minimise

the inherent risks of the contract

Contracts as risk tools are used to minimise

the inherent risks of the contract

Risks with a contract tosupply an APPLE

LOW RISK

Risks with a sale ofbusiness contract

HIGH RISK


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How courts interpret contractsHow courts interpret contracts Courts use rules of construction as

pointers to discover the presumed

intention of the parties to a contract.

The rules are not slavishly applied.

The rules are used to produce as

reasonable and just result as possible.


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Rules of Contract ConstructionRules of Contract Construction

The object of construing a contract is to ascertain what the mutualintentions of the parties were as to who is to do what, how and whenfrom the words they used to express the obligations each assumedby entering into the contract.

The intention of the parties is the meaning of the words they haveused. There is at common law no intention independent of thatmeaning.

The intention of the parties must be ascertained from the words used,in light of the surrounding circumstances and the object of thecontract, in so far as the object has been agreed or proved.

Courts construe the objective intention of the parties not the partiesactual intention.


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Rules of Contract ConstructionRules of Contract Construction

Business common sense is sometimes used in addition to the wordschosen by the parties. Here the courts look at the purpose of thecontract, whether the form of the contract was a standard form ornegotiated by the parties, and the commercial experience of the

judge who is to construe the meaning of the words used.

Where the words used are clear, the court must give effect to themeven if they have no discernible commercial purpose.

Although not overtly recognised, courts sometime manipulate theconstruction of a contract to achieve a fair result on the facts asascertained by the court.

In construing a contract clauses must not be considered in isolation,but must be considered in the context of the whole of the contract.


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Rules of Contract ConstructionRules of Contract Construction The words of a contract should be construed in their grammatical

and ordinary sense, except to the extent that some modification isnecessary to avoid absurdity, inconsistency or repugnancy.

The ordinary meaning of a word is its meaning in its plain, ordinaryand popular sense, although that sense may be a sense among aparticular group of persons.

Where a contract contains technical terms the court may discoverthe meaning of those terms using a dictionary, or where the

technical terms are in dispute the court may only proceed uponcalling expert evidence as to what the terms mean.


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Rules of Contract ConstructionRules of Contract ConstructionImplied terms

Courts may imply terms wherea contract is silent upon apoint but only if all of the next5 conditions are able to be

satisfied: it is reasonable ;

it is necessary to givebusiness efficacy to thecontract;

it is so obvious a term it goeswithout saying;

it is able to be expressedclearly;

it is not contrary to an express

term.

Special situations

Standard form contracts

Any special conditions aregiven greater weight to thestandard conditions in thecase of conflict


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Drafting the Contract Use standard form or not eg Law Society

or own

The need to ensure that what the partiesare seeking to achieve will be achievedthe contract being a checklist to achieve

this Performance is the key


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Specific Contractual Terms &Conditions

Goodwill

Lease issues

Employees

Reduced Deposit Clauses

Exclusion Clauses Early Access


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Goodwill is incorporeal personal property The

Commissioners of InlandRevenue v Muller &

Cs Margarine Ltd (1901) AC 217 has no value independent of the business to

which it attaches In Commissioner ofTaxation vMurray (1998) 72ALJR 1065,

Therefore is its crucial to identify the bundle ofassets and source of goodwill to capture it for apurchaser:


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Goodwill examples

A company which operates a businessdistributing high value medical equipmentin Australia has developed important

commercial and personal relationshipswith the German manufacturer of theequipment. The purchaser will need toensure that it takes an assignment of theexclusive distribution agreements and towork on the relationship with the German

manufacturer. It would be prudent for thepurchaser to meet the management ofthe supplier in Germany and perhaps toretain the vendor as a consultant for aperiod of time to massage the transfer.


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Goodwill examples

The vendor is selling a well known conveniencestore which is located in a particularly busy area,

with lots of passing traffic and good parking. Theresidual term of the lease is relatively short. Thepurchaser will have to ensure that it renegotiatesthe lease term to ensure that its rights to the

premises are secured.


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Goodwill

If there is a risk of customerswalking after the vendorleaves, it may be necessary tomaintain a retention fund fromthe sale proceeds from whichmoney can be repaid to you aspurchaser if customers are lostthrough no fault of thepurchaser.

Retention funds are oftencoupled with clawbackprovisions of various levels ofsophistication.

The other ways of protectingfrom a loss of goodwill is torequire the vendor to grant arestraint of trade.

Besides penalties for losspurchasers negotiation earnoutprovisions which increase thepayment for the sale to avendor upon successfullymaintaining profitability


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Goodwill example

An electrical contractor servicing domesticcustomers has had considerable success from

advertisements placed in the Yellow Pages overa number of years. The company also has easyto remember telephone numbers. The companyname contains the name of the vendor that the

vendor wishes to retain.


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Lease of Premises

New lease or assignment

If a real property lease is being assigned

remember to advise vendors that heassignment does not extinguish theirliability under the lease: Only a new leasewill do this

Is term of existing lease sufficient tosecure value of business for purchaser.


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Employee Issues

Both vendor and purchaser need to be aware ofemployee issues.

Four types of employees Key employees who must be retained if goodwill is to

be secured

Those offered employment

Those not offered employment

Those offered employment but decline to beemployed


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Terms & Conditions

Reduced Deposit ClausesIannello & Anor v

Sharpe [2007]NSWCA 61

5% paid on exchange No Completion Need to consider if

balance of unpaid

money penalty In this case held to be

a penalty

14. Reduced Deposit

Notwithstanding anything else hereincontained, the Vendor shall accept, onexchange of this Agreement, paymentof $225,000.00 being part of thedeposit. The parties expressly agreethat if the Purchaser defaults in theobservance or performance of any

obligation hereunder which is or hasbecome essential the balance of thedeposit, namely $225,000.00, shallbecome immediately due and payableand the Purchaser shall forfeit thewhole of the sum of $450,000.00pursuant to Clause 9 hereof to theVendor.


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Reduced Deposit Clauses

To minimise penalty issue never reducedeposit

But how to negotiate this with purchaser

Be firm

Be innovative take balance by promissory

note or bill of exchange or bank guarantee


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Exclusion Clauses & S 52

You cannot contract out of s 52.

In entering into this agreement the

purchaser acknowledges that ithas not

relied on any statement, representation or

warranty by or on behalf of the vendor

whether express or implied as to ... Clarke equipment Australia ltd v Covcat Pty ltd felling

machine, exclusion clause in contract no effect.

Collins Marrickville Pty Ltd v Henjo investments Pty ltd.


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Tenders & S 52Tenders & S 52

Representations that a project will takea stated period of time and it does not or

the start is delayed beyond the time it isrepresented to commence may amountto misleading and deceptive conduct.

Section 51A shifts onus of proof for

predictions. A representations as tofuture action must be made uponreasonable grounds.

OConnor & sons Pty ltd v Entact clough Pty ltd.


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Tenders & s 52A RFT that does not indicate that strict

compliance with the terms of the tender isessential gives to a tenderer not

shortlisted a right to injunct the tenderprocess (MacMillans case)

A tender that is not evaluated in

accordance with how tenders wererepresented to be evaluated may bemisleading (Hughes Aircraft v AirservicesAustralia)


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Early access

To premises

To executed documents that can facilitatecompletion

To staff, key personnel orclients/customers


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Early Access

Do not permit early access

Do not have documents held in escrow

Rather than early access providesupervised training

Rather than early access allow due

diligence


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What is due diligence? What is the purpose behind due

diligence? Who Conducts due diligence? What is the due diligence process?

Where is information obtained? Lessons from the cases.

Overview


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Contracts as risk

minimisation tools?

Contracts as risk

minimisation tools?

Less riskLess risk as level of risk increasesas level of risk increasesleast formal to most formal form

form of Agreement oral contract of written

contract

RiskRisk

MoreMore

Formality &Formality &

LegalityLegality

Acquisitions

5 year HDPESupply contract


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LEGAL RISK MANAGEMENT

1. Understand the legal aspects.

2. Identify potential risks.

3. Take practical steps toeliminate/minimise those risks.

By taking actions that: Reduce the likelihood of an event;

Reduce the consequences of an event;

Transfer in full or in part the consequences of an event(Negotiate a price to accept the risk); and/or

Avoid the event.


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Reduce the likelihood of an

event Due Diligence


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Reduce the consequences of an

event Warranties

Liquidated Damages

Restraints of Trade

Post employment of key personnel

Exclusion clauses


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Transfer in full or in part the

consequences of an eventFirmPrice

A price which is not variable for any reason

FixedPrice

A price, the final value of which is fixed byreference to some variable parameter such asinflation, currency exchange rate, ormaintainable profits of the businesses

Earnout/

WorkoutPrice

A price based on the post acquisition profits ofthe business so that the seller shares in the ongoing growth of the businesses


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Avoid the event

Dont proceed with the purchase or sale


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Questions?Questions?

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