Chapter 7
The telltale signs of the overseller — buyer beware
Assume for a moment that a buyer does their preparation. They know exactly what they want, when they want it and how they are going to apply the good or service. They have initially taken care of the springboard aspects of the contract. They will deal with the safety net during the course of the discussions.
There is not much more a buyer could do to prepare themselves for the negotiations.
The negotiations start and things are very friendly. How does the buyer know they are dealing with an overseller or someone who is only worried about signing on the dotted line, and that working out how they will perform in the deal is an issue they will postpone for the future?
It is realistic to assume that in almost all contracts there is dimension of bluff and bluster. Both parties at various stages may overstate positions they have or their commercial needs to enhance where they think their strengths in the negotiation are.
Along with this there will generally also be a degree of overselling by the person providing the good or service.
In a contractual relationship, slight overselling is not necessarily a problem. However, if it appears at all, it should happen right at the outset. Often it is necessary to pitch the qualities and attributes your product or service has very highly in the initial phases so as to attract the interest of the buyer. If you do this sufficiently skilfully and speak in very general terms about what your product and service can do for your counterparty and how it can help them in their business, as a seller you will generally be safe.
On the other hand, as a buyer, if you take the general statements on faith and they are the basis for entering into a contract, you are not doing your job properly on the level of either the springboard or the safety net.
While it has now become a cliché, the doctrine of caveat emptor still largely prevails. Buyer beware! There is still a dimension of responsibility on a purchaser to look after their own interests during the course of the negotiations. Statements that are at a high level of generality are like the preview before the movie. After seeing the trailer you can’t say you’ve seen the film (although with modern Hollywood, there is an argument to say you may have already seen the best bits). You need to descend to the contractual depths.
Example
James Smooth is a high-profile real estate agent. He has a select piece of waterfront property as one of his listings. He has an affluent single Korean investor interested in purchasing the property. At an initial meeting at Mr Smooth’s offices, he tells the investor: ‘This is the best waterfront property in Sydney. You won’t find better.’
He then takes the investor to look at the house. It is a grand house with fabulous views. The vendor is seeking a top-of-the-market price for the purchase. Given the qualities of the property and importantly what has been represented to him by Mr Smooth, the investor buys the property without dealing with any other agents or assessing the market more generally.
He soon realises he has bought the property at approximately 15 per cent above its real market value and that there are properties with better prospects and nicer views at lower prices.
He complains to Mr Smooth about his misrepresentation of the market position of the house. In particular, he is angry about being told it is the best property of its kind in Sydney. He is of the view that this was simply a lie.
In this case there would be real doubt as to whether the investor had a genuine and sustainable claim against Mr Smooth.
It is a matter of common knowledge that salespeople, and in particular real estate agents, have a gift for hyperbole. This is a more polite way of saying that at times they oversell.
As stated, the law allows for a certain degree of puffery or chest-beating in a contract negotiation. It is highly likely the representation made by Mr Smooth (that this was the best property of its kind in Sydney) would be considered a puff and therefore was not a representation on which a party such as the investor could rely in entering into the contract.
As a purchaser of a good or service your best guide as to whether you are dealing with a deceptive or shadowy seller is your intuition. It is remarkable how during the course of a negotiation and in conversation you develop a sense of the honesty and integrity of the person you are dealing with. Almost infinitesimal aspects of body language and the more subtle elements of communication create an impression of that person.
However, there are a number of signs or indicators that you can use to identify whether or not you are dealing with an overseller. These are detailed over the remainder of this chapter.
They talk the talk — where is the walk?
The classic formulation of the spiv is to congest their conversation with myriad concepts that both disorient and seduce the purchaser. It is important to be wary of fast talking and high-pitched promises that are grandiose. Assuming that the purchaser is a sophisticated acquirer of goods and services and knows what they want, they will have a sense of what the good or service can actually do for them in a business or other context. Promising the world when something less is actually what is asked for is both unwise on the part of the seller and is an early indicator that you may be dealing with a contracting counterparty who is less than frank. This is an early warning sign.
The talk and the reality don’t match
As set out above, it is important to always consider what you are being told in the context of the product, service or asset you are buying. This will provide you with a powerful insight into the honesty, integrity and confidence of the person seeking to sell it to you.
Example
Fred wishes to sell his Italian trattoria to Fletcher Food. The trattoria at maximum can feed 50 people in a sitting. It is only open for lunch and dinner and closed on Mondays and Tuesdays. The sales figures presented to Fletcher by Fred reveal a thriving business that appears to be going at maximum velocity for each moment the doors are open. Fletcher, while experienced in the restaurant industry, has no personal experience of the geographical area in which Fred’s business is located and has never run a trattoria before. Fletcher is enticed on the basis of the profit figures as presented, and enters into a contract.
Using the example of Fred and Fletcher again, at no stage did Fletcher ask for any of the information that he needed to verify the financial performance of the business. Given this was the thing that attracted him most, and ultimately was the issue that caused him to purchase, no amount of enquiry and research on this aspect is too little. Beware of the summariser!
In this example Fletcher is agog with the prospect of a highly profitable business. However, he has not sat back and objectively assessed whether the figures presented to him are a realistic indicator of the financial performance of the business. He needed to consider what the likely reality is in the context of what Fred said the business is doing. This would have given rise to further questions for Fred in drilling down or pursuing from him in more detail aspects of the business that give rise to such an apparently stellar financial performance.
Statements that seem incongruous with the product to be sold are of great concern in any negotiation.
I believe what you tell me, but I still want to see the paperwork
A hatchback is not a sedan, even if the person persuading you of this seems all wise!
It is one thing to be the beneficiary of an oral or even written representation as to the financial performance of a business or the qualities and attributes that a product or service has. It is another to actually see it. Generally speaking there will be a trail of paperwork or evidence supporting the representation. The prudent purchaser should always ask for these. This is particularly so if the purchase is expensive and the good or service to be acquired is important for the purchaser’s business.
Generally speaking you should be wary of summaries of financial or other data made by the seller of a good or service. It is possible to summarise the performance of a business or a product or service in a way that shows it to be vastly different from the reality. By failing to include salient information the overseller creates an image in the mind of the purchaser that does not match reality. They are not making any active misrepresentation as to the attributes. They will throw their hands in the air when accused and say, ‘But I didn’t say anything about that.’ However, their failure to disclose all relevant information in relation to the product, service or asset is a fact that gives rise to a false impression as to what it is.
Example
An overseas private equity firm wishes to buy into an Australian retail business. The retail business is not listed on the stock exchange. During the course of the due diligence process, the retail business provides summaries of financial performance for the prior five financial years. It does not deliver to the overseas private equity firm the audited accounts, monthly management reports or any other ‘hard’ financial data.
The summaries are discrete and deal with only sections of the relevant information. This was done in a calculated way by the manager of the retail business so as to create an appearance of prosperity and no warranties are given in the agreement. The private equity firm does not ask for the hard data. After running the business for a while, the equity firm realises the summaries of the financial data were some distance from the truth in the actual financial performance of the retail chain.
While it may have claims against the vendors, its failure to drill down and ask for the hard data supporting or justifying the summaries has led to this problem. The private equity firm would not have bought the retail business if it had known that the financial position was as delicate as the hard financial data revealed.
The private equity firm is in a position of pursuing legal claims in a jurisdiction it is not familiar with against a now shadowy opponent with uncertainty as to where the purchase money has gone.
In this case a little more foresight and rigour in the due diligence process would have revealed that the summaries were inaccurate. Although they did not tell lies as such, they omitted details that were relevant and material to a proper understanding of the financial position of the company and its business.
Fast with the mouth, slow with the pen
Any representation made to you as the buyer of a product or asset should be something the seller is willing to put in writing. If they are not willing to do this, that should create a large degree of suspicion in your mind.
Putting something in writing has the benefit of permanency. If you receive a document making written representations as to quality or attributes, there is limited risk you will misperceive or fail to understand what you are being told if it is clear and reasonably expressed.
This is an echo of my prejudice for written contracts. Oral representations fall into the same trap as oral terms. In disputes in which oral representations are important, there is generally a vast difference of opinion as to what was said by the representor. He or she often denies saying anything like what the listener says they heard. The ability for denial in writing is far more limited. While there may be a dispute as to the meaning of the words used, this is more easily resolved. In most cases, the words simply mean what they say. Placing another interpretation on the words seems phoney.
Any person who makes a representation should also be willing to back it up by something in writing. This may mean an email or a letter where the sales person sets out what the product or asset will do. It may be a sales brochure. It may be a printout of a PowerPoint presentation. The form in which the writing is expressed does not really matter. So long as it is legible and comprehensible, you have improved your position strongly as a buyer if you enter the contract on the assumption or the belief that the product, service or asset has the qualities and attributes it is said to have.
Example
Sarah goes to an electronics store to buy a notebook computer. She needs it to be able to translate handwriting in both English and French. She explains this to the salesperson who recommends a particular notebook at the higher end of the cost scale. Sarah asks for a brochure on the notebook so as to make sure it can do everything she wants it to, but is told there are no more brochures left. She is loath to push the sales person too far by asking to send an email or a fax setting out what the functions are. In the true spirit of the impulse purchase, she buys the notebook.
A week later, when in Paris on business, Sarah attempts to draft a document that was to be quickly and electronically translated into French. The machine does not work. She later discovers the computer has no ability to interpret her English handwriting into French. This was an extremely important aspect of the deal and she wouldn’t have bought that particular notebook if she had known it didn’t have this function.
Although Sarah’s unwillingness to push the salesperson to the point of getting the representations in writing (the brochure) was understandable on an interpersonal level, it has led to her problem. She was told (honestly or dishonestly) that there were no more brochures setting out the attributes of the notebook. She was given a categorical assurance by the salesperson that the notebook would do what she needed it to do. This was false. Sarah’s unwillingness to have the salesperson commit in writing as to whether the essential elements she wanted in the contract were satisfied by the notebook caused the problem. She would not have bought the notebook if the true position had been represented or explained to her.
We don’t provide warranties — company policy
Warranties can be an extremely useful device for a seller in making sure all the aspects of the good or service, and some underlying issues, can be resolved.
They act as express representations in the contract as to a fact or state of affairs.
Example
Rich Investment Company wishes to buy a piece of land owned by Boxy Storage as well as all the company’s shares (and therefore the entire business). That means, given the law in the relevant jurisdiction, two contracts. One contract for the sale of land and the other for the sale of the shares and business.
In the contract for the sale of the business, various warranties are sought by the buyer in relation to the business and its financial performance. They also seek warranties in relation to ownership, intellectual property rights and other branding matters that the buyer is particularly keen on. As there is great potential for uplift in that aspect of the market, the purchaser wants to use the branding of Boxy as a platform to roll out a chain of branded storage centres.
The warranties involve an assertion as to the amount of prepayments that had been made by customers. They also contain assertions as to loans to directors and shareholders and that the company is not involved in litigation.
After the purchase is completed it transpires that the directors of Boxy had loaned themselves $700 000 immediately before the sale. This causes the warranties to be false. This may allow the purchaser to claim against the directors and shareholders of Boxy for the recovery of those monies.
Further, it transpires that the accounts that have been provided to the purchaser by Boxy were false. However, there was also a warranty affirming the accuracy of the accounts that had been provided. Again, a claim against the shareholders and directors of Boxy could be made by the purchaser.
This illustrates the utility of warranties in contracts. It causes the other party to commit to you.
If the seller is not willing to give warranties in relation to the product, good or service that should be a source of great concern. It effectively means they are willing to sell something to you that they are not willing to stand behind. While there is often a great deal of wrangling in negotiation about the precise terms of a warranty, a party’s reluctance to give one at all is indicative of a lack of faith in their product, good or service. It is axiomatic that, if they have no faith in the product, neither should you! If you are not getting warranties you should take all steps humanly possible to get as much information as you can about what you are buying.
Warranties look and sound like dry and tedious aspects of negotiating a contract. They are classic safety-net provisions. However, they can save a lot of anguish and heartache at the back end if they are given the attention they deserve and warrant.
Anyone who is not willing to give warranties on an in-principle basis essentially is not willing to stand by what they say they can deliver. If what they say is true, there should be no problem in them warranting it. Warranties are a big issue. You need to work out as a buyer what you want comfort in relation to. As a seller you need to precisely and in detail know what you can represent or warrant that is true and supportable.
Dealing in broad brush strokes — the big picture people
It is important to be wary of any seller who deals in generalities as their mode of business. As indicated, puffery and a limited amount of chest-beating is allowed at the outset of the negotiations. In the seduction or enticement phase, there generally needs to be a hook to attract your interest. However, once your interest has been piqued the work then starts. It is important to quickly get down into the detail.
Anyone who is willing to talk about the detail but not record it in the written agreement is a person to be wary of.
There is generally no good reason to avoid having a detailed and written agreement; avoidance is ordinarily used to enable one party to keep its options open. Anyone who as a seller wants to undertake a significant commercial transaction on a very broad and general purchase order or exchange of letters is possibly not someone you as the buyer want to do business with. These are standard contractual terms. The more of the safety net you can incorporate in a case like this, the better off you will be.
As a generalisation, the more broad-brush the agreement, the less of a safety net is incorporated. This is generally in the seller’s interest and to their benefit. On the other hand, it is generally to the purchaser’s detriment and against their interest.
These are our standard terms and conditions
There are no standard terms and conditions. Subject to terms implied or incorporated by law, everything in a contract is open to negotiation. Any vendor who proffers their terms and conditions as being standard, meaningless, mandated by law or ‘just there to keep the lawyers happy’ is a person to be wary of. Generally, those terms and conditions will be drafted in the favour of the seller. They will limit warranties and limit all sorts of prospective liabilities the seller has. If you are provided with a copy of these terms and conditions, even if you do not read them, you are likely to be found by a court to have agreed to them. Then it’s too late. Your position has been compromised. Closely review all terms and conditions provided by a seller of goods and services.
Do not blindly accept them on the basis of a strong assertion by a seller. The great skill of the seller may be to coerce you into executing or entering into an agreement that you do not have a chance to negotiate and that is against your interest.
These examples are by no means a comprehensive list of indicators that you are dealing with an overseller or a counterparty to watch vigilantly.
Your intuition is the key! If you have a bad or suspicious feeling about the person on the other side of the negotiation, you should take every step to make sure safety-net provisions are negotiated to the fullest extent possible and included in the contract to your maximum benefit and interest.
Keep asking for information in writing!