Keeping quiet when selling-up can be costly

Its judgement might serve only to confirm the position under English law, but a case last month at the Commercial and Admiralty Court provides cause for consideration to any contractor who comes to sell their business, writes Richard Nicholas, of the technology practice at legal firm Browne Jacobson LLP.

What do you do if, having provided a seller with forecasts and business plans in good faith – you subsequently learn that one of your customers is intending to stop purchasing from you?  Do you tell (and risk the purchaser pulling out), or stay silent (after all – isn’t the generally principle “buyer beware”?) Well if you want to avoid a later claim for fraudulent misrepresentation, you’re likely to have to come clean to the prospective buyer.

Silence, when you know an honest statement you made is no longer true, can amount to fraudulent misrepresentation.  This is not the first time the courts have made this point, but it does set the bar higher for the sellers of businesses, who must now balance the threat to the sale against the (very real) threat of a claim, in respect of which they would not be able to limit liability (since it is impossible to limit liability for fraudulent misrepresentation). 

Buyers of the business who feel they have been misled may well to seek to bring a claim for fraudulent misrepresentation, in which case even a well-drafted limit of liability will not help the seller, now exposed to unlimited damages and/or a claim to rescind the contract and recover costs.  Its enough to hopefully make sellers of business think twice, before allowing a buyer to rely upon a statement that’s no longer true.