Chapter 6
Traps for the seller — pitfalls in negotiations
Commercial negotiations can be a risky business. Your natural impulse to enthusiastically market the products and services you deliver can have the potential to lead you into legal trouble.
Misleading and deceptive conduct — what is it?
The law says you cannot engage in misleading and deceptive conduct or conduct that is likely to mislead or deceive.
Section 52 of the Trade Practices Act 1974 provides the following:
A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
This section applies nationwide. There are respective provisions in state legislation on dealing with ‘persons’ so that both companies and almost all other entities are covered as far as misleading and deceptive conduct is concerned.
The range of activity that may be misleading and deceptive is extremely broad. An example of some of the conduct that can be misleading and deceptive is as follows:
- spoken words
- written words
- gestures
- silence or failing to respond to a question or proposition
- advertising or marketing
- doing things on the basis of an assumption that had developed between two people
- predictions or opinions
- the direct comparison of products or services.
Misleading and deceptive conduct can be anything that creates an impression in another person about a state of affairs or certain facts that is misleading and deceptive. It is not necessary for you to intend to be misleading and deceptive to infringe this area of the law. Innocent statements made with the best of intentions with an honest belief in the truth of the comment can still be misleading and deceptive.
Example
XYZ Computers Pty Ltd is a company that sources and sells computer hardware. Freedom Finance Ltd is a medium-sized financial institution. Freedom Finance seeks to open a new branch. A procurement officer from Freedom Finance undertakes a negotiation with a representative from XYZ Computers for the purchase of 300 computers (being terminals and PCs). During the course of negotiations the procurement manager from Freedom Finance says, ‘You guys have the best price, things are looking good. It all looks great! We would love to do business with you. What are your delivery times like? We will need the computers in three weeks. Can you deliver?’ The sales team member from XYZ Computers says, ‘That’s no problem. We will place orders with our suppliers today to make sure we can meet your three-week deadline.’
The Freedom Finance representative makes no comment in reply. The true position is that Freedom Finance is negotiating with three hardware suppliers and is seeking to extract the best price. While the XYZ Computers price was the most competitive in the negotiations to this point, Freedom Finance does not want to commit to a service provider until it finally explores all options to extract the best deal.
As a result of the conversation XYZ Computers places an order incurring a liability of $700 000 with its respective suppliers of terminals and PCs. A week later the procurement manager from Freedom Finance sends a letter to XYZ Computers thanking them for their time but indicating they will be sourcing the computers with another business. XYZ Computers has committed to orders from its suppliers. Those commitments are irrevocable. It will need to pay for the terminals and PCs irrespective of whether there is a final contract with Freedom Finance.
Now assume the Freedom Finance procurement manager had not made a comment to the effect that, ‘This all looks great! We would love to do business with you’, but had merely not responded to the assertion by the XYZ Computers representative XYZ would be ordering product. Its silence may still be considered by a court to be misleading and deceptive. This is because the court may consider their conduct predatory. It may be seen that a reasonable and proper response was for the Freedom Finance manager to say, ‘Don’t do anything yet. We are still negotiating with other parties. We will contact you and have a written contract drawn up when and if we agree to go with you.’
XYZ Computers may allege it was misled and deceived by the procurement manager from Freedom Finance in that he did not clearly indicate that negotiations with other suppliers were continuing and that there was no contract. It interpreted that conversation with the Freedom Finance manager as meaning that it was to order product. The Freedom Finance representative let the response hang without telling XYZ this would be unwise given there was no commitment in the eyes of Freedom Finance.
Depending on the final terms of the evidence given by the witnesses on either side, context being everything, it may be that a court finds Freedom Finance liable. This liability would arise even though there was no intention by Freedom Finance representatives to mislead and deceive.
Written and spoken words are the most common ways in which misleading and deceptive conduct occurs.
Silence or failure to respond to a question or proposition may constitute misleading and deceptive conduct. It requires the person engaging in the misleading and deceptive conduct to intentionally withhold information.
Knowingly allowing someone to rely on mistaken understanding as to a state of affairs may be misleading and deceptive conduct in this context.
The good news is that making a misleading and deceptive representation is not enough for a claim to be made against you. It is necessary for the person to whom the representation has been made to rely on that representation. If they have not relied on a representation, no claim can be made.
Example
A representative of a professional services partnership attends a meeting with a prospective major new client in the mining industry. During the course of the meeting the prospective client is advised that the professional services firm acts for three corporations with international mining interests. The purpose of this representation is to add a lustre to the firm and show that it has industry experience with some of the top players in the field. The marketing manager fails to advise that the firm has not done any work for these clients for five years and the relevant principals at the firm with contacts with those businesses have since left.
On the basis of its price competitiveness the prospective client enters into a contract for services with the firm. It later comes to light that the representation was misleading and deceptive in that the firm did not have the three international mining businesses as clients as at the date of the representation and that the principals of the firm who had contacts in that area had long since left.
The new client complains to the firm about misleading and deceptive conduct. It foreshadows a damages claim against the professional services firm.
As set out above, an essential aspect in establishing you have suffered damage arising from misleading and deceptive conduct is that the representation has been relied upon. The mining industry client admits to price being the most important. It may be difficult to persuasively establish to a court that it relied solely upon the assertions of industry know-how in its retention of the professional services firm. Many other factors such as availability, reputation and primarily price inform its choice. In this sense it will be difficult for it to persuade a court that if the representations of industry know-how had not been made, the client firm would not have been retained.
Example
A representation is made by a manufacturer of parts for car assembly plants that it can source a part necessary to repair a broken-down piece of assembly equipment from the US within 48 hours. It quotes a premium price to the car manufacturer given the speed of sourcing the part and that it is only one of two Australian businesses that can get it and have the machine working again. Later a written quote is provided indicating it will take no less than five days for the part to be sourced from the US after the quote was received. The customer instructs the distributor to source the part from the US. On the third day after the quote has been sent the car manufacturer complains about the absence of the part. The distributor refers to its written quote and says that its ultimate representation, and a contractual term, was that the part could not be sourced earlier than five business days. The car manufacturer complains that it could have obtained the part within a shorter time frame from the distributor’s primary competitor. It alleges that it was misled and deceived into entering the contract with the distributor on the basis of the representation that the part could be sourced within 48 hours. However, the car manufacturer ignores the later quote.
A court may find it did not reasonably rely on the initial oral quote given that it was countermanded by a later written quote. It did not rely on the representation. Reliance is key. It is not merely a formal requirement.
Example
A large property trust represents to a property management company that, ‘The Board has decided that all of our commercial property management will be placed with you guys from the start of the new financial year. We have seven buildings in the city with 250 000 square metres of lettable commercial space, 98 per cent of which is currently tenanted. You can expect management fees in excess of $1 million a year on the rates we are currently being charged by our property managers at the moment.’ Apart from feeling a warm glow of prosperity, the principals of the property management company do not employ any further staff, acquire any further plant or equipment or take any deliberate step to address this influx of new work. They have sufficient capacity in their business to absorb this new work without the need for further acquisition of plant, equipment or staff.
The representation is false. There has been no decision by the Board of the property trust to this effect. In fact, there is an intention to keep the property management services with the current service provider. The representation is made to dishonestly secure a personal favour by the employee of the property trust making the representation.
The property manager complains of misleading and deceptive conduct by the trust. However, it has taken no steps in reliance on the representation. While it has been misled and deceived as to the position of that property trust with its property management services going ahead, it has suffered no damage as a result of the misrepresentation. It has not altered its position. The claim for misleading and deceptive conduct would be without a consequence, that is, damage, even if there were a later contract.
A misleading and deceptive representation may prevail even though a later contract is entered into. If the subject of the representation is not covered by the later contract then the contract does not dissolve any misleading and deceptive conduct.
Example
A retailer of large-scale audiovisual equipment represents to a public company that all of the AV equipment it sells has a 10-year warranty from the date of purchase — ‘that is why we stand by it so strongly’. On the basis of the quality of the AV equipment and warranty, the company decides to purchase the equipment. The contract reveals no warranty. Four years later the sparingly used AV equipment fails during a major client presentation. It causes major embarrassment. As a result of the appearance of incompetence, a major customer decides to place its further business with another entity. The AV breakdown showed the presenter as a chump. It costs a lot to lose the client.
The company complains to the seller of the equipment that it had failed. It claims repairs on the warranty and alleges damages being the loss of the client solely attributed to the failure of the equipment. The seller responds that there is no contractual warranty for repair as the company did not buy one.
As in the case above, it is a question both of reliance and of a later contract being entered into. It may be contended by the retailer that no matter what representations were made to induce a sale, the contract clearly sets out the terms and conditions of the purchase. If representations were made to the contrary during the course of negotiations, these representations were overtaken by the contract documents. It would assert that a party cannot rely on pre-contract representations to enter a contract that itself is in different terms from the representations. The contract prevails.
On the other hand, the purchaser of the equipment would say that the contract was silent on the terms of the warranty and the representation that a 10-year warranty prevailed over the equipment was very important to it in making its purchase.
Again, depending on the circumstances, there is a risk that a court would find the retailer has engaged in misleading and deceptive conduct. The damage suffered by the company may be the cost of repairing the equipment that the manufacturer would otherwise have undertaken under a warranty. There is doubt, however, that the court would award damages for loss of the client given that it may consider it too remote from the actual damage suffered as a result of the misleading and deceptive conduct (that is, the misrepresentation that a warranty was implied in the contract).
Talking the talk — the art of selling
The law allows a degree of latitude in sales presentations or initial negotiations. Some exaggeration is allowed. Negotiations in very general terms not dealing with specific products or services and the attributes of those products and services have generally do not constitute misleading and deceptive conduct. Examples include:
- ‘Happy Partners Lawyers provides the best legal services in the market.’
- ‘Happy Partners Lawyers is the premier provider of legal services in the Australian market.’
- ‘We deliver a service and product that is second to none.’
A significant pitfall for negotiators has been making comments directly about industry or market competitors. There is a natural impulse in promoting and marketing your product or service to address the qualities, attributes and deficiencies of products manufactured by competitors. In this process there may be a tendency to exaggerate or highlight deficiencies in a competitor’s product. The law places a great deal of responsibility on you as to the making of the representation. This is called ‘comparative’ marketing or advertising.
In comparative advertising or marketing you need to ensure all comments about your competitor are absolutely correct. Examples include:
- Things that are generally safe to say if they are provably correct are:
- ‘Barry’s Bearings do not make products to the same level of workmanship or materials that we do.’
- ‘Our after-sales service is the best in the market. You will not find better.’
- ‘Barry’s Bearings make bearings at a cheaper price. They do not have the same levels of attention to detail in the manufacturing process as we do.’
- Things that are ordinarily unsafe to say unless they are absolutely correct are:
- ‘Barry’s Bearings use inferior products and they lie about the materials used in the production of their bearings.’
- ‘Barry’s Bearings provide absolutely no after-sales service at all. They advertise this as being one of their great value-ads but you will find if you use them that it just doesn’t exist. They are liars.’
- ‘Barry’s Bearings’ products are cheaper than ours because they are not made to proper industry tolerances. The bearings will work for a short period of time and then fail. This can be both unsafe to your workforce and cause huge damage in downtime when your machines aren’t working. Their product is rubbish.’
It is not illegal to disparage or criticise a competitor. However, if what you say is not absolutely true you are in real danger of a claim of misleading and deceptive conduct being made against you. It is a very high risk. In undertaking this form of advertising, marketing or selling you are running a very fine line.
Often businesses in marketing their products like to identify their customers or clients. If a particular manufacturer of products provides its product to industry leaders, there is an associated glow of quality and pedigree for your product. However, if you seek to use this strategy, precision in what you say is crucial. If they still use the product then it will not be misleading and deceptive to indicate this. However, if they were ex-customers, generally the use of words like ‘the types of businesses who’ve used our fishhooks are ... ’ is appropriate. This contains no suggestion that they are still using your fishhooks if they are no longer customers.
You have more latitude when talking about the pedigree of your customers. It is much less likely that a customer or former customer will take offence at these references and complain. However, if you are going to refer to them in writing, it would be prudent to obtain the written consent of the client.
What are the consequences for me if it is found I have been misleading and deceptive? Generally, an award of monetary damages is made against a misleading and deceptive party. The dangers for misleading and deceptive conduct are different from those for breach of contract.
However, it is necessary to establish that actual damage has occurred — that means the misleading and deceptive conduct has actually caused damage. Misleading and deceptive conduct without provable financial damage does not generally justify court proceedings.
Example
Fabulous Software Services Pty Ltd has a high market share and a peerless reputation for business accounting software. Sam the Software Man is a software distributor. Happy Mortgage Brokers is a medium-sized mortgage broking business with 10 branches. Happy Mortgage Brokers wants to buy a new software accounting system. It approaches Sam the Software Man and asks specifically for a tailored software program by Fabulous Software Services. Sam realises the wholesale price of Fabulous Software products of this kind leaves him little margin for profit. Given his long-standing relationship with Fabulous Software he has packaging for Fabulous Software products. In a desire to maximise his profit, he packages Super Soft products (a premium market competitor with Fabulous Software) as a Fabulous Software program and provides it to Happy Mortgages.
Happy Mortgages subsequently realises it has been sold a product inferior to that which it thought it bought. It advises Fabulous Software. Fabulous Software complains to Sam who admits to packaging the inferior product as their own. However, Sam tells Fabulous Software that he provided the Super Soft product.
While Fabulous Software may have a claim for the loss of the sale, it is a small amount of money. It does not commercially justify a claim. Although Fabulous Software feels its reputation has been horribly misused through the misleading and deceptive conduct of Sam, it has suffered no significant damage as a result of the misleading and deceptive conduct.
The question the court generally asks itself in determining whether any damage has been suffered by a party who alleges it has been the victim of misleading and deceptive conduct is: What position would that person have been in if the misleading and deceptive conduct had not occurred? Has the person making the claim sustained disadvantage as a result of altering their position, as a consequence of the misleading and deceptive conduct?
Example
An automotive company provides written assurances to a public relations firm that it will place no less than $1 million business with it per annum for three years. The document containing the representation is not sufficient to be a clearly enforceable contract.
However, the public relations company opens a new office closer to the head office of the automotive company, employs further staff and buys plant and office equipment so as to conduct the business. The automotive company then places its business with a competitor of the public relations company. The public relations company would not have opened the new office, employed further staff or purchased further equipment if not for the strength of the representations made by the automotive company. The court finds the automotive company has engaged in misleading and deceptive conduct. It is liable to the public relations company for damages. Those damages are to put the PR company in a position it would have been in if the misleading and deceptive conduct had not occurred. That is, the automotive company may be obliged to meet all further costs of the lease of the new premises, pay staff redundancies and compensate the PR company for all costs ‘thrown away’ in relation to the plant and equipment.
That may mean reimbursing it for all the equipment purchased that is unnecessary for the ordinary conduct of its business and that cannot be redeployed elsewhere. This could be a significant amount of money.
The court examines how much worse off the person who has been the victim of misleading and deceptive conduct is. It does not look at how much better off he or she could have been had the misleading and deceptive statements been true.
The company and its people can be liable
Individuals who are employees or representatives of a corporation can be sued personally for any misleading and deceptive conduct as people who are ‘knowingly concerned’ in the misleading and conduct. This means the company or employer can be sued jointly with the person making the representations. The company is considered the primary representor. The person who has conveyed the representation may also be sued as having been knowingly concerned in the conduct. Both parties have a potential personal liability.
Example
Sturdy Constructions and Acreage Development Company enter into a joint venture proposal. Acreage Development will commit land it owns and Sturdy Constructions will construct commercial warehouse premises on them. The contract provides a sunset clause for Sturdy Constructions to complete its work. If it does not do it by a set date then it must pay an amount of money in damages to Acreage Development. Halfway through the construction of the warehouse premises a director of Sturdy Constructions advises the director of Acreage Development that the construction will take two months extra given that steel roof trusses from Europe have been delayed. The director of Acreage Development says, ‘That won’t be a problem. We won’t rely on the damages clause. We understand that’s out of your control.’
Three days after the sunset date passes, Acreage Development sends a letter of demand to Sturdy Constructions. It makes the damages claim on the failure to meet the sunset date.
Acreage Development sues.
As a counter claim, Sturdy Constructions alleges that Acreage Development engaged in misleading and deceptive conduct and that the director who made the representation was a person knowingly concerned in that misleading and deceptive conduct and therefore should be liable to the same extent or equally with Acreage Development.
The liability is mutual.
There is a risk the court would find that because the representation was made by a director of Acreage Development in the course of its business, that company is liable. Further, the director, because of personal involvement in the process, has aided, abetted, counselled or procured the misleading and deceptive conduct. Alternatively the company was knowingly concerned in the misleading and deceptive conduct. Both the company and the director are liable for misleading and deceptive conduct.
The good news! Not all cases of misleading and deceptive conduct mean that damages flow from them. Just because misleading and deceptive conduct may have been engaged in, it does not mean there is a proper foundation or basis for court proceedings as a result of this conduct.
Example
A large accounting firm is fitting out its newly leased premises. The design staff of the company retained to source desks and boardroom tables source Oregon redwood tables. The accounting firm is attracted to the style and shape of these tables but it turns out that the tables manufactured and delivered are made in Thai teak.
The accounting firm is not happy; however, the Thai teak and the Oregon redwood are of similar colour and texture. The Thai teak is in fact significantly more expensive than the Oregon redwood. The design company does not propose to charge the accounting firm any uplift in price and provides a superior product (Thai teak) at the same price as the inferior product (Oregon redwood). The accounting firm nevertheless asserts misleading and deceptive conduct in that it wanted the Oregon redwood. The tables are otherwise fit for purpose and within all the relevant design parameters set by the accounting firm.
The accounting firm has, in all likelihood, suffered no financially compensatable damage. In fact it has obtained a benefit from the misleading and deceptive conduct in that it has got tables of a higher quality of timber notwithstanding that it may not be happy about it. While there has been misleading and deceptive conduct in that it has not been given what it thought it had bought, this conduct has not caused any damage.
The dos and don’ts in relation to misleading and deceptive conduct are summarised in table 6.1.
Table 6.1: dos and don’ts
| Dos | Don’ts |
| Make sure every statement you make is supportable by fact and is ‘doable’. | Don’t exaggerate elements of the deal that will be considered beneficial for your customer. Precisely, accurately and factually identify what the purchaser will get, when they will get it and what the products’ general applications are. |
| Promise and deliver — make sure you can. | Don’t withhold information that is material to your customer’s consideration in buying the product. |
| Set out in precise detail the qualities and attributes of the products you are selling and your service ability. Tell it like it is. | Don’t attribute qualities or applications to the product it does not have. |
| Provide customers with the entire picture. If the product was not precisely designed for the application the client seeks to put it to, advise the client of this. | Don’t make promises or predictions about the product that cannot be fulfilled or that you have no reasonable grounds for making. General statements of comfort are okay. Precise assertions of the attributes of the product are dangerous. Do not undertake a direct comparison of your product to a competitor’s products or misrepresent or criticise the competitor or its products unfairly. |
| Clear up any uncertainties that have arisen. Be clear about any difficulties you will have in either the manufacture or delivery of the product in the time frame sought by the customer — it is counter productive and often dangerous legally to pay lip service to the customer’s demands. The implications may be more than a cranky customer — it may arouse a legal liability against your business. | Don’t say anything you cannot factually support or prove. |
| Always qualify any representation or sales pitch you make if you can. Do not imply your competitor’s products are inferior if this is not actually true. Do not identify your customers as people who have used the products unless you either know or believe they are agreeable to you using their corporate reputation and branding in this way. |