Etienne Lawyers shows you show watch outs in contracts and other legal documents

1. Warranties, Representations
& Indemnities
Of Buying a Business
Presenter: Steve Brown
B.Ec, LL.B (Syd), M.App.Fin (Mac), A.Bus, FAICD
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2. Topics
 Issues to Consider
 Pre-contractual representations
 Specific Contractual Terms & Conditions
 Negotiation of Contract warranties etc
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3. Formalities and terms
Terms of a
contract
express
implied
conditions
warranties
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4. Taking Instructions
 Find out what it is that the client wants. It
is trite just to say a vendor wants a sale
and a purchaser to purchase a business
 Lawyers role is to facilitate the successful
achievement of our clients goals in other
words to ensure performance but of what!
 Of what is the aim of taking instructions.
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5. Taking Instructions
 Checklists are a useful tool to obtaining
proper instructions
 Checklists minimise a lawyers exposure to
professional negligence claims
 Only every act for one party
 Work with clients accountant regarding tax
structure issues on sales and purchases
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6. Issues to Consider - Vendors
 Should the vendor obtain a guarantee for
performance of a corporate
purchaser(Swept-Up Marketing Pty Ltd v Voltrant No. 282 Ltd (NSW)
Supreme Court, 26 April 1989, )
Indemnity
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7. Issues to consider - Purchaser
1. Does the purchaser have the finance
2. Does the purchaser have the capacity to
run the business
3. Determine the legal structure for the
purchaser by considering:
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8.  the simplicity of the vehicle and its cost of
establishment;
 the nature and size of the business;
 the potential for the growth of the business and
the need for additional capital for growth;
 the taxation consequences of each vehicle;
 the manner in which the business is to be
managed and the degree of owner involvement;
 the cost and complexity of terminating the vehicle
on the owner exiting the business or passing it on
to their family;
 the structure of the purchaser’s family; and
 the potential for the business to fail and the
implications if it does fail.
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9. Negotiation Issues – Pre-
contractual representations
 Negotiating What to Look Out For…Statutory
Impact on Contract Law
 Misleading or deceptive conduct
 Trade practices act (Cth) ss 52 & 53
 Fair trading act (NSW) s. 42
 Unconscionable conduct
 Trade practices act (Cth) pt IVA
 Fair trading act s. 43
 Contracts Review Act (NSW only)
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10. Misleading or Deceptive
Conduct
 Strict
liability  Silence
 Actual deception  Ambiguity
 Overall  Erroneous
impression assumption
 Product puff  Half truths
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11. Misleading conduct - s 52 Example
Four principles were established in the case of Taco Co
of Australia v Taco Bell Pty Ltd (1982) ATPR 40-303
as assisting to determine whether conduct is misleading
or deceptive.
1. The relevant section of the public must be identified.
2. All people within that section must be considered
including the intelligent and not so intelligent, the
educated and uneducated.
3. Evidence that someone was misled is helpful, but is
neither conclusive nor essential.
5. When a misconception has arisen it is important to
determine why, in order to see if it was the business'
conduct that caused it.
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12. Misleading conduct - s 52
 A SECOND PRINCIPLE:
It's the overall impression on the target
audience that counts
 silence can be
misleading - if there is a
duty to speak
 a prediction can be
misleading - if there's
no reasonable ground to
make it
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13. The Difference Between
Agreements and Contracts?
Agreements are not as a
general rule:
Legally enforceable
Courts will not involve
themselves.
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14. The Difference Between
Agreements and Contracts?
Contracts are ALWAYS:
Legally enforceable
Courts will enforce as the
law dictates
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15. Non Enforceable Agreement
If you wash my car
I’ll give you $10
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16. Non Enforceable Agreement
I’ll pick you up for
dinner at 8 o’clock
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17. Contracts & Agreements – what
are they?
Practical Answer – they are both
Risk Minimization tools that operate
as
Checklists
or Rule Books by applying
Performance standards
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18. Contracts & Agreements – How
Are They Risk Tools
 Agreement to meet and discuss a
form of long term supply
arrangement
 Contract to supply an
apple
 Contract or agreement to
sell a toll manufacturing
business
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19. Contracts & Agreement - As
Checklists or Rule Books
 Who is to do what – who is to sell; Who is
purchase (whatever it is that is being sold).
 When are the servicesgoods to be supplied
by vendor– when are they to be paid for by
purchaser.
 How are the servicesgoods to be supplied.
 Consequences of good or poor performance.
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20. Why have a Contract instead of
an Agreement
Risk
Formality &
Legality
least formal to most formal form
form of Agreement oral contract of written
contract
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21. Contracts as risk tools are used to minimise
the inherent risks of the contract
Risks with a contract to Risks with a sale of
supply an APPLE business contract
HIGH RISK
LOW RISK
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22. How courts interpret contracts
 Courts use rules of construction as
pointers to discover the presumed
intention of the parties to a contract.
 The rules are not slavishly applied.
 The rules are used to produce as
reasonable and just result as possible.
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23. Rules of Contract Construction
 The object of construing a contract is to ascertain what the mutual
intentions of the parties were as to who is to do what, how and when
from the words they used to express the obligations each assumed
by entering into the contract.
 The intention of the parties is the meaning of the words they have
used. There is at common law no intention independent of that
meaning.
 The intention of the parties must be ascertained from the words used,
in light of the surrounding circumstances and the object of the
contract, in so far as the object has been agreed or proved.
 Courts construe the objective intention of the parties not the parties
actual intention.
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24. Rules of Contract Construction
 Business common sense is sometimes used in addition to the words
chosen by the parties. Here the courts look at the purpose of the
contract, whether the form of the contract was a standard form or
negotiated by the parties, and the commercial experience of the
judge who is to construe the meaning of the words used.
 Where the words used are clear, the court must give effect to them
even if they have no discernible commercial purpose.
 Although not overtly recognised, courts sometime manipulate the
construction of a contract to achieve a fair result on the facts as
ascertained by the court.
 In construing a contract clauses must not be considered in isolation,
but must be considered in the context of the whole of the contract.
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25. Rules of Contract Construction
 The words of a contract should be construed in their grammatical
and ordinary sense, except to the extent that some modification is
necessary to avoid absurdity, inconsistency or repugnancy.
 The ordinary meaning of a word is its meaning in its plain, ordinary
and popular sense, although that sense may be a sense among a
particular group of persons.
 Where a contract contains technical terms the court may discover
the meaning of those terms using a dictionary, or where the
technical terms are in dispute the court may only proceed upon
calling expert evidence as to what the terms mean.
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26. Rules of Contract Construction
Implied terms Special situations
 Courts may imply terms
where a contract is silent  Standard form contracts
upon a point but only if all of
Any special conditions are
the next 5 conditions are able
given greater weight to the
to be satisfied:
standard conditions in the
 it is reasonable ;
case of conflict
 it is necessary to give
business efficacy to the
contract;
 it is so obvious a term it goes
without saying;
 it is able to be expressed
clearly;
 it is not contrary to an express
term. www.etiennelaw.com

27. Drafting the Contract
 Use standard form or not eg Law Society
or own
 The need to ensure that what the parties
are seeking to achieve will be achieved
the contract being a checklist to achieve
this
 Performance is the key
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28. Specific Contractual Terms &
Conditions
 Goodwill
 Lease issues
 Employees
 Reduced Deposit Clauses
 Exclusion Clauses
 Early Access
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29. Goodwill
 is incorporeal personal property The
Commissioners of Inland Revenue v Muller &
C’s Margarine Ltd (1901) AC 217
 has no value independent of the business to
which it attaches In Commissioner of Taxation v
Murray (1998) 72 ALJR 1065,
 Therefore is its crucial to identify the bundle of
assets and source of goodwill to capture it for a
purchaser:
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30. Goodwill examples
 A company which operates a business
distributing high value medical equipment
in Australia has developed important
commercial and personal relationships
with the German manufacturer of the
equipment. The purchaser will need to
ensure that it takes an assignment of the
exclusive distribution agreements and to
work on the relationship with the German
manufacturer. It would be prudent for the
purchaser to meet the management of
the supplier in Germany and perhaps to
retain the vendor as a consultant for a
period of time to massage the transfer.
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31. Goodwill examples
 The vendor is selling a well known convenience
store which is located in a particularly busy area,
with lots of passing traffic and good parking. The
residual term of the lease is relatively short. The
purchaser will have to ensure that it renegotiates
the lease term to ensure that its rights to the
premises are secured.
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32. Goodwill
 If there is a risk of customers  The other ways of protecting
walking after the vendor from a loss of goodwill is to
leaves, it may be necessary to require the vendor to grant a
maintain a retention fund from restraint of trade.
the sale proceeds from which  Besides penalties for loss
money can be repaid to you as purchasers negotiation earnout
purchaser if customers are lost provisions which increase the
through no fault of the payment for the sale to a
purchaser. vendor upon successfully
 Retention funds are often maintaining profitability
coupled with clawback
provisions of various levels of
sophistication.
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33. Goodwill example
 An electrical contractor servicing domestic
customers has had considerable success from
advertisements placed in the Yellow Pages over
a number of years. The company also has easy
to remember telephone numbers. The company
name contains the name of the vendor that the
vendor wishes to retain.
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34. Lease of Premises
 New lease or assignment
 If a real property lease is being assigned
remember to advise vendors that he
assignment does not extinguish their
liability under the lease: Only a new lease
will do this
 Is term of existing lease sufficient to
secure value of business for purchaser.
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35. Employee Issues
 Both vendor and purchaser need to be aware of
employee issues.
 Four types of employees
 Key employees who must be retained if goodwill is to
be secured
 Those offered employment
 Those not offered employment
 Those offered employment but decline to be
employed
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36. Terms & Conditions –
Reduced Deposit Clauses
Iannello & Anor v
Sharpe [2007]
NSWCA 61
 5% paid on exchange 14. Reduced Deposit
Notwithstanding anything else herein
 No Completion contained, the Vendor shall accept, on
exchange of this Agreement, payment
 Need to consider if of $225,000.00 being part of the
deposit. The parties expressly agree
balance of unpaid that if the Purchaser defaults in the
observance or performance of any
money penalty obligation hereunder which is or has
become essential the balance of the
 In this case held to be deposit, namely $225,000.00, shall
become immediately due and payable
a penalty and the Purchaser shall forfeit the
whole of the sum of $450,000.00
pursuant to Clause 9 hereof to the
Vendor.”
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37. Reduced Deposit Clauses
 To minimise penalty issue never reduce
deposit
 But how to negotiate this with purchaser
 Be firm
 Be innovative take balance by promissory
note or bill of exchange or bank guarantee
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38. Exclusion Clauses & S 52
 You cannot contract out of s 52.
In entering into this agreement the
purchaser acknowledges that it has not
relied on any statement, representation or
warranty by or on behalf of the vendor
whether express or implied as to ...
 Clarke equipment Australia ltd v Covcat Pty ltd felling
machine, exclusion clause in contract no effect.
 Collins Marrickville Pty Ltd v Henjo investments Pty ltd.
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39. Tenders & S 52
 Representations that a project will take
a stated period of time and it does not
or the start is delayed beyond the time it
is represented to commence may
amount to misleading and deceptive
conduct.
 Section 51A shifts onus of proof for
predictions. A representations as to
future action must be made upon
reasonable grounds.
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40. Tenders & s 52
 A RFT that does not indicate that strict
compliance with the terms of the tender is
essential gives to a tenderer not
shortlisted a right to injunct the tender
process (MacMillan’s case)
 A tender that is not evaluated in
accordance with how tenders were
represented to be evaluated may be
misleading (Hughes Aircraft v Airservices
Australia)
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41. Early access
 To premises
 To executed documents that can facilitate
completion
 To staff, key personnel or
clients/customers
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42. Early Access
 Do not permit early access
 Do not have documents held in escrow
 Rather than early access provide
supervised training
 Rather than early access allow due
diligence
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43. Overview
 What is due diligence?
 What is the purpose behind due
diligence?
 Who Conducts due diligence?
 What is the due diligence process?
 Where is information obtained?
 Lessons from the cases.
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44. Contracts as risk Acquisitions
minimisation tools?
Risk
5 year HDPE
Supply contract
More
Formality &
Legality
Less risk as level of risk increases
least formal to most formal form
form of Agreement oral contract of written
contract
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45. LEGAL RISK MANAGEMENT
1. Understand the legal aspects.
2. Identify potential risks.
3. Take practical steps to
eliminate/minimise those risks.
 By taking actions that:
 Reduce the likelihood of an event;
 Reduce the consequences of an event;
 Transfer in full or in part the consequences of an event
(Negotiate a price to accept the risk); and/or
 Avoid the event.
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46. Reduce the likelihood of an
event
 Due Diligence
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47. Reduce the consequences of an
event
 Warranties
 Liquidated Damages
 Restraints of Trade
 Post employment of key personnel
 Exclusion clauses
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48. Transfer in full or in part the
consequences of an event
Firm A price which is not variable for any reason
Price
Fixed A price, the final value of which is fixed by
Price reference to some variable parameter such as
inflation, currency exchange rate, or
maintainable profits of the businesses
Earnout/ A price based on the post acquisition profits of
Workout the business so that the seller shares in the on
Price going growth of the businesses
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49. Avoid the event
 Don’t proceed with the purchase or sale
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50. Questions?
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