Sale of Business – sale of defective stock and designs

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This is a note on the recent case of Farallon Pty Ltd & Anor v Nu-Lec Industries Pty Ltd [2008] QSC 151 (10 November 2008) which looks into the issues surrounding the sale of defective stock and designs.

Issues

Following the sale of a business, what is the extent of a vendor’s liability (post settlement) to a purchaser for loss or damage resulting from:

(1)   defective stock sold to a purchaser that is then on-sold to a purchaser’s customers; and

(2)   items (including work-in-progress) made and sold by a purchaser based on a vendor’s defective design and specifications?

 

What happened?

The purchaser bought a business that designed, manufactured and sold electrical equipment, including “reclosers”.

On completion, the purchaser paid for stock, including 150 reclosers. The purchaser also bought the intellectual property for the design and manufacture of the reclosers.

The purchaser then sold around 4,000 reclosers to various customers and distributors around the world. These included the stock purchased from the vendors and reclosers the purchaser made according to the vendor’s design.

The reclosers are alleged to be defectively designed, and the customers pursued the purchaser under section 52 of the Trade Practices Act 1974 (Cth) and for breach of its common law duty of care.

In turn, the purchaser sued the vendor and their guarantors under the agreement for sale.

The purchaser claimed over $8 million against the guarantors of the vendors’ obligations under the agreement for sale. The guarantors argued that they could not be held liable and applied to the Supreme Court of Qld that the claim against them be summarily dismissed.

 

What the Court said

Justice McMurdo dismissed the application for summary judgment. This means the ultimate outcome of this litigation remains unknown and will need to be determined through the usual litigation process.

 

Lessons for business sellers and buyers

This case highlights some big issues for vendors and purchasers of manufactured goods, especially those to be made based on specific know-how, designs, patents and the like.

A prudent vendor should ensure it is not liable for any goods transferred or sold post completion, and ensure that such limitation of liability is clearly expressed in the agreement.

By the same token, for the benefit of purchasers, this case demonstrates that when buying a business, in addition to considering what goods or stock will be transferred, all goods to be transferred and the basis upon which they are manufactured should be carefully examined. The agreement should contain express warranties in relation to these issues for the purchaser’s protection.

In any event, appropriate (commercial) insurance cover should always be in place as a protection against such serious claims.

For more information regarding the Sale of Defective Stock and Designs

Please contact our Business Development Team or call us on (07) 3252 0011 to book an appointment with one of our specialist Commercial Lawyers today.

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