JRSB205 (summer 2010)
Topic 3, Lesson 3, Activity 1: Misstatement
Group E
1. Develop an example of a potential negligent misrepresentation being made in the context of your fictional business.
Mr. Montcalm had been managing and operating Abraham Café and Montmorency Restaurant in Indian Cabins, Alberta, up until his wife death early March 2002. Mr. Montcalm and his wife owned in a proprietorship scheme both Abrahams Cafe and Montmorency Restaurant. Mrs. Montmorency managed the operation of both businesses.
Mr. Montcalm listed these businesses in a selling price of $99,999 in April 2002.
In May 2002, James Wolfe, acting on behalf Le Petit Group Inc., expressed his volunteer of purchasing both businesses in an expansionary policy.
Mr. Wolfe received three documents on June 3. Those documents included for both business:
a) The balance sheet as of December 31, 2001;
b) A profit and loss statement for the year 2001; and
c) An income statement, showing the revenue and expenses for the years 2000 and 2001.
Mr. Wolfe sought more financial information, he requested it by letter; also he asked to disclose information. Mr. Montcalm delivered a significant part of the financial information requested by Mr. Wolfe by June 7.
Mr. Wolfe met Mr. Montcalm and had a conversation in which Mr. Montcalm made the following statements, not by writing:
a) That his wife’s wages were included in the expenses shown in the financial statements for salaries and wages paid; and
b) That the business was making more money than it had made when his wife was running the business.
Mr. Wolfe made Mr. Montcalm’s offer to purchase both businesses (Abraham Café and Montmorency Restaurant) on June 10, 2002, in the amount of $99,998. Mr. Wolfe attached many conditions to his offer. The conditions included the requirements that the buyer’s financial advisor would review and approve the financial statements.
Luis Montcalm accepted the Mr. Wolfe’s offer on June 15, 2002. The purchase agreement was signed, and Mr. Wolfe paid the balance of the purchase.
One of the purchase condition required that an adjustment in the purchase price, up or down, would be made on the basis of review statements that were to be prepared for the period of business operation from January 1, to June 15, 2002. These financial statements would then be compared with the financial statements prepared as of December 31, 2001.
Mr. Wolfe refused to accept the financial statements provided by Mr. Montcalm.
Le Petit Group Inc. operated the restaurant business from July 1, 2002, until early 2010. Mr. Wolfe argues that the business lost a substantial amount of money in 2002 and 2003, that he was eventually able to earn a small profit, but that the business never earned the profit that it should have earned according to the financial statements for 2001.
Mr. Wolfe suspected that the financial statements for 2001 and those prepared for the first five and one-half months of 2002 were deficient in a number of respects and failed to comply with the generally accepted accounting principles. He adds the errors and omissions which he found in the financial statements.
According to the financial statements at June 13, 2002, the operating expenses of the two businesses ($90,000) exceeded the total income ($70,000) by $20,000.
The evidence shows that Mr. Montcalm withdrew all of the cash from the bank accounts of Abraham and Montmorency, after paying certain current accounts payable of the businesses.
Mr. Montcalm argues he considered this money to be from his wife’s earnings and so he did not transfer the bank balances to Mr. Wolfe.
Le Petit Group Inc. sues Mr. Montcalm for negligent misrepresentation.
2. Create a list of steps your small business could take to divert or avoid potential lawsuits based on misrepresentation.
Related with misrepresentation, anyone is safe as long as her statements are true; so, for avoiding potential lawsuits based on misrepresentation Le Petit (its representatives) should be sure to say the true about product, services, and anything related with Le Petit.
In promoting this conduct, policies could be developed and established to avoid unnecessary and costly litigation:
Training and continue education: training is a powerful and cheap option to avoid issues related with misrepresentation. For those people who have a contact with customers, providers, etc, training in what and how to express could help to avoid misrepresentations. Particularly for people related with business statements, external relationships, publicity, etc.
In writing: a common scenario in litigation about negligent misrepresentation is related with the story viewed from different angles; put in writing those messages, reports, etc, that they are sensitive for the business development, and customers, partners and provider relationship.
Know when to say "NO": the management should have the experience and intuition to say no to some business opportunities. Some attractive opportunities conduct with high probability to a lawsuit (e.g.: different opportunities to rent the restaurant or provide catering).
Work in known areas: innovation in business is good, but it requires take risks. Training could help to decrease risks as well as avoidance of them.
Answer any inquire, phone calls, letter: Do Something Nice for Clients, satisfy customer, partners and providers concerns. If some mistake is made, offer an alternative solution or compensation that the other part feels congratulated. If is possible, write down the agreement.
Document: document all that it is possible. Policies, recommendations, agreements, disagreements, maintenance, etc.
Follow-up standards: anything in the business should follow standards assuring the easy understanding, replacement and avoiding mistakes.
Spend time with customers/providers, ask questions, listen: many misrepresentations are generated by the non good communication between the parts.
Never tell a lie: to lie is the base of the negligent misrepresentation claim action. Avoiding lying means to avoid potential lawsuits based on misrepresentation.
Disclose information: in those subject related with evaluation, comparison, etc, to disclose information save litigations for misrepresentation. The information is a key subject because represent power and money, but at the same time potential litigations. To know what, where and when to disclose information helps avoiding lawsuits based on misrepresentation.
Don't pretend to be an expert: each person in Le Petit has an area of expertise; this person should not speak with such authority that the customer, provider, partners believes she knows as much as contractor, lawyers, engineers, accountants, sommelier, etc. Irremediably, this behavior conducts to some lie.
Insurance: it is a good practice having liability insurance.
Never be satisfied with the office practice: the common law evolves, what it could be admitted several years ago, could not be done it today. Having a critical point of view helps avoiding litigation due to misrepresentation causes.
Settle: the judicial process does not guarantee anyone they will win. Judges and juries have been known to deviate from past decisions. There is no other activity undertaken in the business world that involves taking time out of a day that can be productive with new business or planning for the future to dwell on a past event. Settlement allows the litigants to move on, and also allows a resolution that is not dependent on the feelings of a third party.
Know good professionals: lawyer, accountants, etc are expert consultants that they could help to avoid lawsuits based on misrepresentations.
[1] Yates, R., Bereznicki-Korol, T. and Clarke, T. (2008). Business Law in Canada (8th edition.) Ontario, Canada: Person Education Canada.
[2] Grape Expectations Wine Emporium Inc. v. Baker Jr., 2010 BCSC 452 (CanLII)
[3] Law Offices of Thomas N. Jacobson. Retrieved June 7, 2010, from http://www.tomjacobsonlaw.com
