LAWS20058 Sally Case Study - Assignment Solution

Q1.

Issue: Intention to create legal relationship is one of the essential elements of a legally binding contract. In the instant case two relatives have entered into a transaction for the sale of business (a suburban store). Hence we need to determine whether their agreements gives rise to legal relationships interse.

Rule:

• The reasonable bystander test which is an objective test of intention rather than merely looking into minds of parties. What would a reasonable person having regard to all circumstances of the case think of the parties intention?
• When dealings take place in a social or friendly context, courts presumes that there is no intention to create legal relations.
• The above presumption is rebutted when the agreement requires one party to significantly change their current position at their detriment.
• The courts will decide the matter so as to give proper effect to the commercial transaction (i.e., its intended purpose)

Application:

Although Ethan is Sally’s cousin, he has put himself in a detrimental position based on the agreement between themselves. The transaction comprises of a sale of entire business at a price of $155,000 which is material. Hence the domestic agreement presumption is rebutted. The price also includes sale of goodwill which further confirms that the intention of the transaction was commercial rather than domestic. 

Conclusion:

Hence, having regard to all the circumstances of the case, a reasonable bystander is ought to think that the two persons intend to create legal relations and hence a binding contract.

Q2.

Issue: A contract could be undermined and its enforceability could be adversely affected if it is induced by either of the parties through exercising misrepresentation. In the instant scenario, the buyer – Ethan, has relied on the representation made by the seller – Sally, by way of trading figure which ultimately turn out to be false and inaccurate.

Rule:

• A contract can be avoided if it was induced by misrepresentation of fact and either party relied on it.
• Contract can only be avoided if it is rescinded in due course and both parties can be restituted to their original position (principle of restitutio in integrum).
• Making a statement / representation having complete faith / belief in its truthfulness is fraudulent misrepresentation. This is also referred to as the tort of deceit, and in such a case innocent party can sue for damages as well.

Application:

Sally disclosed trading results of the last three years to the buyer (Ethan), who completely relied on the figures and results showed to him as he had no experience in the business matters. Sally also had to explain to him the strong profit and growth prospects depicted by such figures which in reality showed a contrived, dubious and false presentation of the business affairs. A mild inaccuracy in presenting business results could be seen as inevitable in business due to inherent limitations of small business bookkeeping and costs associated with it, however in this case, it appears that Sally had no belief in the truthfulness and accuracy of the information she presented to Ethan. As Ethan relied on such misrepresented figures, following the decision in Attwood v Small a case of misrepresentation could be brought in the instant scenario.

From the details available of the circumstances, it is also evident that the statements made (in the form of trading figures presented) were not merely opinions or beliefs, but rather facts which defined Sally’s business and her goodwill with the customers for which extra money was charged. Hence Sally cannot go away by saying that her representations were merely puffery as in Dowling v. NADW Mktg., Inc.

The courts would also have regard to the steps taken by Ethan to verify the accuracy of representations made by Sally about her business. In this case Ethan had no prior experience in business dealings, and the fact that the convenience store was a small business would have made it impossible for him to go through business records and accounts. However, he could have considered appointing a business consultant, which he chose not to and relied on the statement of account presented by the seller.

Conclusion:

Sally deliberately overstated the business revenues to make profitability sound higher and more attractive to the buyer Ethan, thereby winning his trust and causing him to have a favorable opinion of the purchase. Hence Sally has caused the contract through fraudulent misrepresentation.

Ethan could sue Sally for damaged i.e. monetary compensation in addition to holding the contract voidable at his option.