Failing the pub test – you can’t contract out of a misleading and deceptive conduct claim

Summary

What are the main lessons from the Cargill case for sellers of businesses or companies and their advisers?

1. Ensure the buyer is provided all material information about the company or business. Especially if it is adverse.
2. Not even the clearest contractual limitation of liability provisions will necessarily protect you from liability for misleading and deceptive conduct.
3. You can be found guilty of misleading and deceptive conduct for undisclosed material problems.
4. Silence can be misleading and deceptive. If you find yourself asking, ‘Should we disclose…?” then you probably should.
5. Representations made in negotiations (such as the oldie but goldie bluff of the existence of competing higher bidders) can be treated as misleading and deceptive behaviour.

The Cargill case

In a judgement handed down earlier this year, Cargill Australia Ltd (Cargill) has successfully claimed that Viterra Malt Pty Ltd (Viterra) and its ultimate holding company Glencore International AG (Glencore) (together the Viterra Parties) made misleading representations during its sale of Joe White Maltings Pty Ltd (Joe White), a subsidiary of the Viterra and Glencore corporate group.

At the time of the sale in 2013, Joe White supplied malt to Lion Nathan, Coopers, Asahi, San Miguel Corporation, Carlsberg, Kirin, and Thai Beverages, and was considered the “largest maltster” in the Asia-Pacific region.

However, after the completion of the sale of Joe White to Cargill by Viterra, Cargill alleged that the Viterra Parties had not disclosed a number of unsatisfactory operational practices regularly engaged in by the Joe White employees and executives, and brought proceedings against the Viterra Parties.

Cargill alleged:

• that during the sale process, the Viterra Parties failed to disclose to Cargill that Joe White routinely supplied malt to customers that did not comply with customer’s specifications and contractual requirements, and in order to avoid any suspicion on behalf of the customer, Joe White employees would then assert that the noncompliant malt conformed to the relevant customer specifications,
• that Joe White employees would manually alter testing certificates such that the certificates provided to customers misstated the results of analytical testing on the supplied malt,
• that Joe White regularly (and incorrectly) represented to customers that specific barley varieties had been used in malt production, when other (non-conforming) malt varieties had in fact been used,
• that additional gibberellic acid¹ was used in the production of malt for customers in circumstances where the use of additional gibberellic acid was expressly prohibited by Joe White’s customer contracts,
• that the Viterra Parties had breached the warranties contained in the main sale document (Acquisition Agreement), in addition to claiming that the Viterra Parties had engaged in misleading and deceptive conduct for the purposes of Schedule 2 of the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law),
• that it would not have entered into the Acquisition Agreement to purchase Joe White if it had been aware of Joe White’s operating practices set out above, and it if had been made aware of the operating practices after the date of the Acquisition Agreement but before the date of the completion, Cargill would have terminated the Acquisition Agreement (and not completed the transaction), and
• that it was induced to increase its bid for the Joe White business in reliance on misleading and deceptive representations made by Viterra Group executives during the blind auction process.

Ultimately, Cargill established that the Viterra Parties engaged in misleading and deceptive conduct during the sale process, including on entering the Acquisition Agreement and prior to completion of the Sale Agreement, and in respect of the blind auction process.

It is uncommon for events surrounding an entity sale to receive extensive judicial attention. This case has illuminated several key points for participants in business and entity sales to consider during any future transactions.

Limitation provisions and disclaimers in sale agreements will not apply to certain kinds of misleading and deceptive conduct

Limitation Provisions

As is customary with most sale agreements, the Acquisition Agreement set out several limitation and qualification clauses. These clauses allocate risk between the buying and selling parties should a claim be made against a buyer or seller relating to the sold and purchased business. These limitation provisions are often a key point of negotiation during the sale process.

In practical terms, the limitation clearly stated that if Cargill’s head company ever sold the Joe White business, then none of the Viterra Parties (and their related entities) would be liable to Cargill under the Acquisition Agreement and the Transaction Documents.

Cargill’s head company Cargill, Inc completed the sale of its malting business to Copagast NV on 31 October 2019. This sale included Joe White, and as a result, the limitation provisions were triggered on the basis that Cargill Inc no longer owned (and controlled) Joe White. The Viterra Parties claimed that the sale of Joe White extinguished Cargill’s claims for the Viterra Parties’ breach of the Acquisition Agreement, breach of the Australian Consumer Law and under the tort of deceit.

Cargill successfully argued that notwithstanding its clarity of language, the limitation provision had no effect in respect of the claims for misleading and deceptive conduct. Cargill contended that, but for Viterra’s misleading and deceptive conduct in not disclosing Joe White’s nefarious operating practices, Cargill would not have entered into the Acquisition Agreement.

It was held that it would be inappropriate for a contract that arose in circumstances of misleading and deceptive conduct to then provide a defence to the misleading and deceptive conduct.

On this basis, parties involved in a sale process should be conscious that limitation provisions in a contract may be ineffective in reducing or extinguishing liability if it can be shown that but for the misleading and deceptive conduct the counterparty would not have entered the contract.

Disclaimers

The Viterra Parties claimed that certain disclaimers contained in information memorandums, management presentations and other documents provided by the Viterra Parties coupled with the limitation of liability terms of the Acquisition Agreement meant that the Viterra Parties could not have made certain representations relating to Joe White’s financial and operational performance.

Justice Elliot stated:

• that certain kinds of disclaimers may not prevent a finding of misleading and deceptive conduct;
• that, in a general sense, the concepts of freedom of contract and allocation of risk do not provide a platform for parties to act contrary to the law, whether by breach of the Australian Consumer Law or by deceit;
• that if a disclaimer contains a statement that excludes liability for misleading and deceptive conduct, this disclaimer will not exclude liability if misleading and deceptive conduct has in fact occurred;
• that disclaimers contained in a contract will be considered as a whole, and a disclaimer is not legally determinative of whether an individual has a claim under the Australian Consumer Law; and
• that it is not possible to automatically exclude the operation of the Australian Consumer Law by virtue of a contractual disclaimer.

Accordingly, parties in a sale transaction should be aware that the risk allocation effected in a sale agreement will not automatically override any breaches of the Australian Consumer Law.

Silence can constitute misleading and deceptive conduct

The Viterra Parties had represented to Cargill that that the Joe White business had a strong track record in relation to its customer contracts, suppled high quality malt and met its customer’s specifications. These representations, which were contained in an information memorandum and a management presentation, did not disclose any information about customers being provided with off-grade barley, and/or barley that had been processed using additional gibberellic acid in conflict with a customer’s agreed specifications.

In considering whether a failure to disclose Joe White’s questionable operating practices was “inadvertent” for the purposes of section 4(2) of the Competition and Consumer Act 2010 (Cth), Elliot J noted that a court could find misleading a deceptive conduct through a combination of what is said, and what is left unsaid. Ultimately, Elliot J considered that in this case, the positive statements made regarding the Joe White business were such that he did not need to consider the silence in respect of the misleading and deceptive conduct in these circumstances.

While not expressly determinative in this case, Elliot J’s comments are instructive for companies considering selling their business, and such companies should ensure that disclosures are complete, accurate and not misleading, as there may be circumstances in which non-disclosure will constitute misleading and deceptive conduct.

Role of key employees as part of the sale process

A number of elements of this case turned on what the Viterra Parties actually knew in respect of the misleading industry practices. The Viterra Parties submitted that the role of the executives in the Joe White business (who knew about the misleading industry practices) was limited to their functions in the Joe White business, and that those executives had no other role in the Viterra Group. In determining what information Viterra and Glencore knew or did not know, Elliot J considered what kinds of knowledge could be attributed to the Viterra Parties. Justice Elliot noted that the primary rule of attribution of knowledge for companies will apply if a person is directing the “mind and will” of the company. Further, knowledge of several individuals can be attributed in certain circumstances where:

• the relevant individuals are directing the mind and will of the company;
• the officer or agent is under a duty and is able to communicate it to others within the company; and
• the knowledge is held in aggregate form.

Cargill successfully established that the knowledge of number of Joe White executives constituted knowledge on behalf of Viterra, on the basis that there was no delineation of Viterra’s business and the Joe White business, those executives were directors and employees of various Viterra entities, and were specifically retained to assist in the sale process.

However, this nexus as between Viterra and the Joe White executives was significantly more nebulous as between the Joe White executives and Glencore. However, the Court found that as the Joe White executives were selected by Glencore to assist it (as well as Viterra) to sell the shares in Joe White (and related assets) authorising the drafting and finalising of marketing and legal documents, that the state of mind must be attributable to Glencore.

For business owners, it is critical to consult and supervise executive staff, particularly where there are separate arms of the business, as knowledge of those employees may be relevant in determining corporate knowledge. This is particularly relevant for sale transactions, where it is customary for a seller to provide broad warranties in respect of the business or entities being sold.

Misleading and Deceptive Conduct in the Sale Process

Cargill further alleged that the Viterra Parties had made a number of representations that the Viterra Parties:

• had received bids that were either close or equal to, or greater than Cargill’s first final bid for the Joe White business (at $405 million); and
• required Cargill to pay an additional $15 million to secure its acquisition of the Joe White business.

These representations were made on phone calls between a senior executive of Viterra and Cargill. Justice Elliot noted that the comments made by the Viterra executive should be considered:

• in combination with each other;
• as part of a dialogue, and in relation to the statements and queries to which they responded;
• against the backdrop of the competitive sale process;
• in light of the relative knowledge of the participants, including that Cargill was unaware of the competitive bids; and
• as informed by the subject matter and apparent purpose of the communications.

These statements were demonstrably false, as the closed bid to Cargill’s original $405 million bid was in fact a $335 million bid from Malteurop Group.

In response to the phone call between Cargill and the Viterra executive, Cargill convened a high level meeting of key decision makers, promptly formulated a response and duly increased its bid.

Justice Elliot found that the statements made by the Viterra executive (which included statements that there were other bidders “at that number”, and that executive would shortly be in contact with the other bidders) conveyed a representation in substance that there were other bids that were greater that Cargill’s $405 million bid. These statements, made in the context of a high stakes and competitive bidding process with no ability for Cargill to legally test the veracity of the Viterra executive’s statements, were calculated to induce Cargill to raise its bid.

The Viterra Parties’ submissions that the increased bid allowed Cargill to make certain requests in respect of the terms of the Acquisition Agreement and secure the deal were rejected by the Court. The Court found that there was no real likelihood that the next closest bidder would increase its bid to match Cargill’s $405 million amount, and there had been no earlier discussions that there was a relationship between the purchase price and the terms of the agreement.

Accordingly, while sellers in a business or share sale transaction may seek to increase competitive tension to increase the purchase price as part of a broader negotiation strategy, deliberately creating an atmosphere of exaggerated urgency can result in such conduct breaching the misleading and deceptive conduct provisions of the Australian Consumer Law. While in this instance, the statements made by the Viterra executive were plainly false, parties should be careful making statements relating to the competitiveness of transactions where:

• the other party has a limited ability to test or verify the representations;
• the other party is likely to take the representations seriously;
• the representations are made in a high stakes competitive transaction; and
• the representations are calculated to induce the other party to adopt a very specific course of action.