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Ask a Lawyer -- Contract Law
Contract Law Question 2
Question: Sir My friend just bought a pizzeria for $40,000. He paid $10,000 and is paying the balance in 20 months. However, the claimed volume of current business is less than one fourth claimed. In fact, people have told him that the former owner has a reputation of being 'mad' and yelled at customers etc. And that people steer clear of this store. Is there any way to force an adjustment of the selling price? Or at least, extend the payments from 20 to 30 payments?
Response: My first question is why didn't your friend ask to look at the seller's books prior to purchase to verify the level of business? It's called due diligence and would have avoided the problem.
I'll make a few assumptions regarding the facts in answering your question: (a) there was a written contract for the sale of the business and (b) the representation by the seller as to the level of prior business was in writing but not made part of the sales contract. If the representation as to sales volume were made a part of the sales contract (usually would be included as a warranty), then your remedy is based upon breach of contract. The case as outlined is much weaker due to the lack of including the false representation in the sales contract. Normally contracts of this type contain what is called an "integration clause". Here is an example of an integration clause:
This Agreement is the entire and sole agreement of the Parties and may be modified or amended only by a written instrument executed by the Parties. There have been no representations or warranties made between the Parties other than those contained in this document.
If the contract for the sale of the pizzeria contained an integration clause, I think your friend is in a difficult situation. The integration clause cuts off any claim under contract. It also most likely cuts off any tort claim for fraud as the contract clearly states that there has been no prior representations or warranties by the seller.
If there is no integration clause in the contract, then the situation improves but it still is not an easy case. There is no contract action that I can see but, rather, a potential tort action--probably fraudulent inducement of a contractual relationship. Here is a standard formulation of the elements of this tort: "Fraud in the inducement requires proof of: (1) a false statement of material fact; (2) that the defendant knew or should have known was false; (3) that was made to induce the plaintiff to enter into a contract; and (4) that proximately caused injury to the plaintiff when acting in reliance on the misrepresentation." HTP, Ltd. v. Lineas Aereas Costarricenses, S.A., 685 So. 2d 1238 (Fla. 1996). On the face of it, this tort seems to fit your friend's situation but there is a weakness--the one relying upon the false representation must have no way of knowing the truth.
In order to establish deception, any reliance upon the false representation must be "justifiable under all the circumstances" Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 322 (1959). It is well settled that " 'if . . . the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations . . . '." Danann Realty Corp. v. Harris, supra at 322 (1959), quoting, Schumaker v. Mather, 133 N.Y. 590, 596 (1892). Fitzgerald v. Hudson National Golf Club, 2004 NYSlipOp 07135 (Oct. 2004).
If your friend was offered the opportunity to examine the books of the pizzeria prior to purchase, then he had the opportunity to discover the truth and the cause of action for fraudulent inducement goes out the window. If it should have been apparent that the sales volume was less than represented merely by observing the pizzeria in operation, then, again, no tort action. Bottom line: I think fraudulent inducement is the theory best suited to the facts related.
We have covered potential legal theories for an action against the seller. Let's discuss the practicalities of the situation. The total purchase price was $40,000. I assume some equipment came with the business--ovens, tables, chairs, etc. Their value would not have been effected by the alleged misrepresentation. Let's say the amount of equipment is worth $10,000 which means your friend only paid $30,000 for rest of the business. Of course this amount of money is an important issue to your friend but the low relative level of damages probably preclude hiring a lawyer and bringing a lawsuit. Your friend may want to consider small claims court where the maximum recovery in New York in $5,000. See New York City Small Claims Court. Small claims court is made for people to come in off the streets and represent themselves. Your friend may want to consider this avenue.
(Please note that the author of this response does not practice in New York and responded principally upon general common law contract principles. Please see the below disclaimer.)
Submitted: 10-23-2004; Dick, New York
Response: 10-25-2004; JJR
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