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An agreement is drafted between 2 parties to sell a small business. The agreement is unconditional. The agreement requires the vendor provide a breakdown of prepaid amounts on settlement by a given time (say 12pm) so the purchase price can be adjusted. The purchaser is then required to settle by a given time (say end of the day).

There is nothing in the agreement that specifically contemplates how breaches are to be addressed. There is nothing specifically stating that payment is contingent on receipt of the information required to the adjustment.

Preparation of the adjustment document reveal that key representations made by the seller (and stated as being key representations) were substantially incorrect.

It is accepted that the seller has breached the agreement in at least 2 ways - They did not provide a settlement document on time, and they made a material misrepresentation.

Questions

(Absent any clauses in the agreement speaking to how conflicts are resolved) -

Does a material breach of the agreement by the vendor allow the purchaser to withhold payment and/or void the agreement?

If the vendor subsequently supplies a correct adjustment (which reflects turnover less then represented and relied on by the purchaser) is the purchaser obligated to settle, even though the vendor is in breach of the agreement?

(Although the jurisdiction is NZ, I am also interested in how this is contemplated in places with similar legal systems like Australia, UK and Canada)

  • has the contract been executed yet or are we discussing if one party can pull out of the contract before it is signed? – Tiger Guy Feb 2 at 23:48
  • @ScottDunnington - the agreement has been executed, due diligence completed and settlement is (now over)due. – davidgo Feb 2 at 23:55
  • I think in the US that until payment has been made the contract has not been executed. – Tiger Guy Feb 3 at 0:22
  • @ScottDunnington I understood executed to mean signed by both parties. Looking at it I see definitions.uslegal.com/e/executed-contract as 2 meanings. The agreement has been signed but I not executed by the definition I think you are using. – davidgo Feb 3 at 0:38
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Does a material breach of the agreement by the vendor allow the purchaser to withhold payment and/or void the agreement?

The purchaser's right to rescind the contract largely depends on whether the vendor's key misrepresentations were fraudulent, since their fraudulent nature contravenes the contract law covenant of good faith and fair dealing. If not fraudulent, then the analysis would center on what ascertainable losses (if any) the vendor would incur as a result of the purchaser's decision.

If the vendor subsequently supplies a correct adjustment (which reflects turnover less then represented and relied on by the purchaser) is the purchaser obligated to settle, even though the vendor is in breach of the agreement?

It depends on who acts first.

The Restatement (Second) of Contracts at § 256 implies that, before the vendor retracts the misrepresentations, the purchaser insofar as injured party would have to notify the vendor that the key misrepresentations have changed his position or that these constitute a repudiation he considers to be final. Obviously the purchaser would be entitled to the reimbursement of his prepayments (see Restatement at § 373).

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    Thank you. Very useful info and link. (It is more likely a case of negligence then fraud on the part of the vendor). Its difficult to put a figure on ascertainable loss as the vendor and purchaser used radically different means of valuing the business. – davidgo Feb 2 at 23:06
  • @davidgo "It is more likely a case of negligence then fraud". In that case, it would be a matter of who acts first, as explained in the latter portion of the answer. It can be quite credible that the vendor's key misrepresentations changed the purchaser's position, especially if vendor and purchaser radically differ on their methods of valuation. – Iñaki Viggers Feb 2 at 23:16
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    Your link to Restatement (second) of Contracts helped my Google-Foo, and provided me the exact answers I needed in the New Zealand Law "Contract and Commercial Law Act 2017", section 37(1)(a) and (b) and 42(3). Thank you. – davidgo Feb 2 at 23:52
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The agreement is unconditional

And yet, you then specify conditions. If the vendor gives the breakdown, the purchaser must settle is clearly a conditional term.

Notwithstanding ...

Material Breach

Does a material breach of the agreement by the vendor allow the purchaser to withhold payment and/or void the agreement?

You use the term material breach as though you think it has some special legal definition: it doesn't. Unless the term is used (and hopefully defined) in the contract it's not something that would come up in a dispute except perhaps in the argument that the breach was immaterial (i.e. inconsequential). If so, a breach that is not material is not grounds for termination but it doesn't follow that a material breach allows termination.

It's possible that you are using "material breach" when you mean repudiatory breach which does allow termination of the contract.

Each of the following constitutes a repudiatory breach of contract justifying termination at common law:

  1. a breach of condition (as opposed to warranty);

  2. a sufficiently serious breach of an intermediate/innominate term; and

  3. a refusal to perform, known as "renunciation".

Failing to provide the settlement document on time is not a repudiatory breach unless and until the delay becomes so long that it would be reasonable to conclude that the vendor does not intend to supply it - this is more likely to be months rather than days.

With respect to the misrepresentation, I can't see that this is a breach of the contract. Where did the vendor make a representation within (as opposed to before) the contract?

A material misrepresentation (which does have a legal definition) before the contract that induced the purchaser to enter the contract may allow the purchaser to void (not terminate) the contract. However, where the contract explicitly provides a mechanism for adjusting the price, it will be difficult for the purchaser to argue that any misrepresentation a) was material or b) induced them to enter the contract because it is inherent in this mechanism that everyone knows the vendor's figures are merely estimates. It's almost reaching the point where the purchaser would have to prove that the statement was not just misleading but actually fraudulent; that is not just that they were wrong but the vendor knew they were wrong and deliberately concealed the correct figures from the purchaser while they conducted their due dilligence.

If the vendor subsequently supplies a correct adjustment (which reflects turnover less then represented and relied on by the purchaser) is the purchaser obligated to settle, even though the vendor is in breach of the agreement?

A breach where the purchaser does not or can not terminate the contract does not allow them to avoid their obligations - withholding payment would be a breach by the purchaser.

There appears to be no obligation on the purchaser to make payment until the vendor's breakdown has actually been provided. However, as soon as that is done, the purchaser must settle or be in breach.

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  • Thank you for this. I did not communicate clearly. There are 2 terms in the same paragraph - the Vendor will provide a breakdown by X time, and the Purchaser will make payment of Purchase price as adjusted. Unfortunately there is nothing stated in the contract that settlement is conditional on the adjustment (although I tend to infer it). I don't think "material breach" has a special legal meaning, I used the term to mean "breach of an important term" - I need to research "repudiatory breach" but I'm not sure it applies here as I expect it is a breach of warranty. – davidgo Feb 2 at 23:31
  • The misrepresenation in question was the turnover of the business. This was made in the contract, and it was explicitly stated in the contract that the purchaser specifically relied on this figure. There is no mechamism in the contract for adjusting the price, and the mechanisms the buyer and seller used to derive the value of the business provide radically different values. Again, thank you for your answer. It is helpful. – davidgo Feb 2 at 23:35

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