Firm’s vendor to pay £15,000 for over-selling profit prospects
The Court of Appeal has awarded £15,000 damages to the buyer of a law firm who was sold the business under a false representation.
Potential buyer Sameer Karim had been told during negotiations that Leicester firm Douglas Wemyss Solicitors was ‘on course’ for a turnover of £640,000 during the year 2008 and net income of £120,000.
But the court heard that the seller, Douglas Wemyss, did not believe the figures to be true. A more accurate turnover figure for turnover was £547,000 or even less, the court heard, with profits of £92,000.
A previous trial before His Honour Justice Cooke had already found that liability against Wemyss had been established both for misrepresentation and breach of warranty. But despite this loss, the judge declined to award Karim any damages because he held that no recoverable loss had been demonstrated.
In Karim & Anor v Wemyss, Lord Justice Lewison (pictured) said that in principle Karim was entitled to be put into the position in which he would have been if the business had the turnover and profit claimed.
‘It seems to me self-evident that a person who buys a business with a warranted profit-earning capacity of £120,000 suffers a substantial loss if the business in fact has a profit-earning capacity of only £92,000,’ said Lewison.
The judge said the reference to the LLP being ‘on course’ to hit turnover and profit indicated – even though it was made three months before the sale – was a ‘continuing representation’ that it remained on that course up until completion, and was an ‘actionable misrepresentation giving rise to a liability in tort’.
Lewison said that Karim had agreed a price of £100,000, of which £68,140 was goodwill, against the warranted profit of £120,000. Applying this to the eventual £28,000 shortfall produced a difference in value of £15,909, rounded down to £15,000.
Lewison also overturned an earlier court ruling that Wemyss was owed a greater sum than the £100,000 agreed as the work in progress had realised greater amounts than envisaged. Karim had accepted liability for £29,075 but disputed a further claim of almost £17,000. The earlier court ruling awarded Wemyss £12,783 of this disputed balance.
The judge said Wemyss, as the original claimant, was required to establish the claim and justify the change of agreed terms file by file. Lewison said this was not achieved and it was unrealistic to expect to prove a negative (prove there was no justification for altering WIP figures).
The amount awarded to Wemyss on the claim was reduced by the full £12,783.