Representation is a statement made before a contract
Madison sold his private dental practice at Jurong Central to Jane after convincing her of the good profitability of the business and the reasons for selling the dental practice. However after the purchase of the business, Jane had found out several deficiencies and possibly even fraud by Madison, she had felt cheated and wanted to sue Madison for misrepresentation. As such, we are advising Jane and the available remedies to rectify the situations.
A representation is a statement made before a contract is made concerning some matter relating to the contract. Representations are the statements made related to the contract but do not form part of the contract (Behn v Burness) (1863). A misrepresentation arises when a person makes a false statement of fact to another which induces the other party to enter into a contract, resulting in loss (Ref: BUS 201 Contract Law and Agency Law Study Guide, Page 80)
Madison made Jane a representation that the flow of business at the dental clinic “is good" and attempted to quantify it by showing his accounts which reflect an annual profit of $120,000. The contract between Madison and Jane is for Madison to sell his dental practice to Jane for $100,000. The key point is that because a representation is not part of a contract, if the representation is untrue, and then there is no breach of contract.
Although Madison did highlight that the accounts shown to Jane does not constitute any part of the “terms of contract or agreement". If a pre-contractual statement is made where one party has special knowledge (in this case, Madison), then it is likely that the $120,000 annual profit representation could be deemed a term of the contract despite Madison’s earlier assertion.
Regardless, under certain circumstances, a false representation may also give rise to a cause of action in misrepresentation. Fraudulent misrepresentation requires a false representation of fact which is made knowingly, or without belief in its truth, or in a reckless and careless way. Misrepresentation can be a vitiating factor, a factor which undermines a contract to some extent.
The fact that Jane did not check Madison’s statement that the dental clinic has an income of $120,000 or by asking to see the audited statements do not affect whether or not Madison had made a misrepresentation to her. In fact, the case suggests fraudulent misrepresentation on the part of Madison since it is unlikely that as the owner of his own dental practice, Madison is not aware of the income that the dental practice is generating in the past years.
In the case of fraudulent misrepresentation, Jane can rescind the contract and claim damages.
We also noted that Madison’s statement that “everything is wonderful… I would not have sold the practice if I am not retiring" could also be deemed to be a fraudulent misrepresentation given that his actions in setting another private dental practice in town and contacting his former patient.
The fact that the dental practice that Madison sold was at Jurong Central while the new one he is setting up in town does not affect the misrepresentation unless it is an accepted industry norm that “retiring" means closing shop in one location and setting up again in another location.
Our advice to Jane is that she does have a case against Madison involving misrepresentation under the law, since she is obviously basing her purchase price of $100,000 on Madison’s representation of how good the business ($120,000 profit)
We are of the strong opinion that Jane can sue Madison in court and since this is also likely a case of fraudulent misrepresentation where Madison presented false accounts to her to induce her to buy the dental practice, a successful court decision will allow her to void the contract (reclaiming the $100,000) and also claim additional damages resulting from the contract (e.g. the 6 months of work where she earned very little or making a loss since taking over the dental practice compared to what she would have earned elsewhere.
Of course, in the interest, they can opt for a private settlement in the present of their lawyers or opt for an arbitration which is fast become popular in Singapore business. Unlike the court system, arbitration matters are confidential and both parties are bound by the arbitrator’s decision. Furthermore, Singapore is acclaimed all over the world for its integrity, predictability and acute appreciation of the need for the law to keep pace with changes in the world.
We had considered the fact that Singapore is fast emerging as a venue of choice for settling commercial disputes out of court, alongside global leaders such as New York, London and Paris. (Ref: The Straits Time, Wednesday Feb 9 Page B4, More arbitration cases head Singapore’s way).
It is concluded that this was a likely fraudulent misrepresentation by Madison during the sales of the dental practice. Jane will stand a good chance in court if she sues Madison. However, Jane should have done her homework carefully before proceeding with the purchase, instead of rushing and not asking any more questions. Although very low, there is also still a slight possibility that Madsion had made an honest misrepresentation. The dental practice may have really made a profit of $120,000 the previous year. Madison in contracting his former customer is not a legal issue, more of a possible ethical issues. (unless Jane have a "non-complete" clause in the term of contract) In this case, Jane will no case against Madsion.