Seller and Buyer Beware : Pre-contractual Misrepresentations

In the recent case of Carazi Pty Ltd v Blow Dry Bar Franchising Pty Ltd (in Liq) the NSW Supreme Court (“Court”) dealt with the topic of fraudulent misrepresentations.

The Court found the plaintiff was induced to enter into a contract with the first defendant due to misrepresentations made by the first defendant and its sole director, the second defendant.

The first defendant and the second defendant made representations to the plaintiff as to the suitability of a franchise location selected by the first defendant for the plaintiff, the profitability and management of the franchise to be conducted by the plaintiff, and the profitability of other franchises. The Court found that each representation was misleading or deceptive in breach of the Australian Consumer Law.

Additionally the plaintiff entered into a lease with a third party in reliance on the defendants’ misrepresentations.

The Court:
• Held that the plaintiff had validly rescinded the franchise agreement with the first defendant;
• Gave judgment for the plaintiff against both defendants in the amount of $732,697;
• Awarded judgment without prejudice to the plaintiff’s right to recover any further damages in respect of the plaintiff’s continuing lease obligations; and
• Ordered that the defendants pay the plaintiff’s costs.

The lesson to be learnt is that a buyer can rescind a contract if faced with a situation where a seller has made misrepresentations which induced the buyer to contract with the seller. Also sellers need to be careful not to make misrepresentations when forming contracts as they can be sued for misleading or deceptive conduct and might have to pay damages.