If the statement was made in the course of negotiations and induced the purchaser to buy the business, there may be remedies at common law for fraudulent, innocent or negligent representation; the statements may amount to the tort of deceit; or the purchaser may have a remedy under the Trade Practices Act 1974 or Fair Trading Act 1999 for misleading and deceptive conduct.

The majority of cases involving false statements and business sales relate to misleading statements about the profitability of the business. However, in the recent High Court of New Zealand decision of Newbrook v Marshall (unreported High Court of New Zealand, 1 December 2000) the false statements related to whether the vendor of the business was aware of potential future competition.

In Newbrook's case the vendors had had their paint and wallpaper business on the market for 3 years when some interest was shown by a prospective buyer. The purchaser alleged that in the course of negotiations he asked the vendor whether the vendor knew of any other paint and wallpaper store opening in the country town where it was located, to which the vendor replied in the negative. The vendor alleged that the only discussions which had taken place in relation to competition related to current competitors. Shortly after purchasing the business the purchasers discovered a business called “The Paint Factory” was opening in the town.

In due course the purchasers instituted legal proceedings alleging that the business had not been a success because of the competition and claiming damages for fraud.

The court held that the vendor's conduct was fraudulent. It found that the vendor had been questioned as to potential future competitors, that he had denied knowledge of the existence of these, that he knew that the purchaser would rely on his statements, and that the purchaser was entitled to damages for loss sustained.

The court found that the existence of potential future competition was relevant and significant in the context of a specialist business dealing with paint and wallpaper in a country town.

Although the purchaser in this case was successful in his action for damages, Newbrook's case illustrates the importance of a potential purchaser of a business obtaining legal advice as to whether statements made by the vendor in the course of negotiations should be included in the contract as conditions or warranties.

From a vendor's point of view, it is important that all relevant facts affecting a purchaser's decision to buy are disclosed and that all statements made by vendors or their agents are factual and truthful.