Follow us


The Federal Court has recently released a decision in Optic Security Australia 2 Pty Limited v YC Investments (NT) Pty Ltd regarding claims made by a buyer for breach of contractual warranties and statutory misleading or deceptive conduct in the context of a sale of a business.

IN BRIEF

  • The Federal Court has recently handed down a decision in Optic Security Australia 2 Pty Ltd v YC Investments (NT) Pty Ltd1 in relation to claims by a purchaser in connection with a sale of a business for breaches of warranties in the share purchase agreement and misleading or deceptive conduct under the Australian Consumer Law (ACL).
  • The purchaser’s claims were unsuccessful on both counts. However, the decision contains interesting observations regarding the application of contractual time limits for warranty breaches, which barred the relevant contractual claim in the circumstances.
  • In relation to the ACL claims, the decision follows previous authority that a contractual provision limiting the time under which a claim can be made under the ACL would be contrary to public policy. This was the right decision in the circumstances, however an appellate court decision in relation to this issue would be welcomed as it is respectfully submitted that the courts may have gone too far in restricting the ability of private parties to exclude statutory rights under the ACL.
  • The court’s judgment also points out that a representation which is in respect to a future matter can include a representation taking the form of opinion or prediction that an event will occur in the future, consistent with prior authority.
  • The case is a useful reminder that claims regimes in private M&A deals are important and need to be carefully considered when purchasers are proposing their cause of action. It also demonstrates that care is needed to methodically work through a claim for statutory misleading or deceptive conduct to enable the desired outcome to be achieved.                       

BACKGROUND

The recent Federal Court decision of Optic Security Australia 2 Pty Ltd v YC Investments (NT) Pty Ltd involved a purchaser claiming against the vendor for what it said were breaches of warranties in the Share Purchase Agreement (SPA) as well as for misleading or deceptive conduct under the Australian Consumer Law (ACL). The purchaser, Optic Security Australia 2 Pty Limited (Optic2), had agreed to acquire the STS Group. The STS Group included Security & Technology Services (NT) Pty Ltd, which had a subcontract with a builder for the construction of security-related communications facilities at the Tindal air force space in the Northern Territory.

The sale completed in November 2018. Over the course of 2019, the purchaser began to have questions surrounding the profitability of the subcontract, culminating in a claims notice being served on the seller on 17 May 2020, with proceedings commenced in November 2020.

The claim for breach of warranty was time barred and the claim under the Australian Consumer Law failed for a number of reasons including because key evidence was not put on by Optic2.

THE WARRANTY CLAIM

The warranty claim alleged that materials provided to the purchaser during the sale process were in breach of the information warranty in the SPA – in particular, that the information provided was, so far as the sellers were aware, true, complete and not misleading or deceptive whether by omission or otherwise and, where consisting of opinions, expectations or beliefs, those were honestly held and had been arrived at on a reasonable basis after full enquiry.

Importantly, the SPA contained the following provision in relation to notices of claims for breaches of warranty:

13.5 Notice and time limits on Claims

(a) The Buyer must notify the Sellers’ Representative in writing of any Claim it has against the Sellers under this agreement (including any breach of any Seller Warranty of Claim under an indemnity), setting out reasonable details of the facts, matters or circumstances giving rise to the breach in the nature of the breach as soon as practicable after it becomes aware of it.

(b) …

(c) A Claim… will not be enforceable against Sellers and is to be taken for all purposes to be withdrawn unless legal proceedings in connection with the Claim are commenced within 6 months after written notice of the Claim is served on the Sellers in accordance with clause 13.5(a).

A “Claim” was defined as “any allegation, debt, a cause of action, Liability, claim, proceeding, suit or demand of any nature whether the present or future, fixed or unascertained, actual or contingent, whether at law, in equity, under statute or otherwise”.

The relevant part of the decision centred on whether Optic2 had given notice to the Seller “as soon as practicable” after it had become aware of the claim.

Evidence was provided by Mr Strathdee, a director of Optic2’s holding company. In cross-examination, Mr Strathdee conceded that “I believed I had a warranty claim well before November 2019”. However, later in cross-examination, perhaps aware of the direction of travel of counsel’s enquiry, Mr Strathdee refined his position to: “I said I believed, I had the hunch, I had the sense that earnings were not – and costs were not disclosed to us”.

In considering this evidence, Justice Charlesworth focused on the fact that a “Claim” for the purpose of the SPA included an “allegation” and noted that, accordingly, the limitation clause should be regarded as referring to facts and circumstances that support an allegation that a warranty has been breached. Her Honour considered that:

“In my view, the obligation to notify of a “Claim” does not arise when the Buyer forms the view that it would succeed in a suit for breach. Rather, the obligation to notify arises when the Buyer comes to believe (rightly or wrongly) in the existence of facts and circumstances that, if true, could properly found an allegation of breach. That construction is supported by the apparent purpose of the clause, namely to enable the affected Seller to have notice of the allegation at the earliest opportunity with a view to considering and resolving it before litigation commences.”

Her Honour went on to say:

“The phrase “as soon as reasonably practicable” does not permit delays referable to Optic2 obtaining authorisation to sue or gathering sufficient evidence to form a view about prospects of success on such a suit or any other matter affecting the willingness or ability to commence legal action.”

Her Honour had also considered evidence from Mr Strathdee that the Buyer had gone through an internal process of briefing its lawyers to determine whether there was warranty claim, recognising that the Buyer thought that there was.

Her Honour further noted that:

“It is relevant that Mr Strathdee is legally qualified and a highly experienced businessman. I do not accept his evidence that he could not personally form a view that there existed a proper basis to allege a breach of the warranty claim without first seeking legal advice from Optic2’s lawyers. … I consider Mr Strathdee’s reference to the existence of a belief that “there was a warranty claim well before November 2019” should be taken at face value: he had formed a belief that the facts and circumstances supported a claim that there was a breach of warranties. That was sufficient to enable Optic2 to give notice of the claimed breach and its nature, together with the facts and circumstances said to give rise to it.”

As a consequence, her Honour held that notice of the claim had not been served on the Seller’s “in accordance with clause 13.5(a)” and therefore the contractual claims could not be enforced.

OPTIC2’S STATUTORY CLAIMS

The Optic2 statutory claims for misleading or deceptive conduct under the ACL failed largely due to a lack of evidence as to critical matters such as establishing a positive case that the forward-looking statements made by the Seller were in fact misleading or deceptive as well as not putting on evidence to its reliance, the true value of the shares acquired and its loss.

There are two points to note in relation to this the statutory case.

First, the vendor had argued that the statutory claim was time barred. Charlesworth J acknowledged authority which held that a contractual provision limiting the time under which a claim could be made under the ACL would be contrary to public policy and therefore void. The vendor had submitted that the prior decision in relation to this point was wrong, though acknowledging it was not “plainly wrong”, the judge, being a judge at first instance, held she was bound to follow it. This was the right decision, and while it is an issue to be discussed in more detail on another day, an appellate court decision in relation to this issue would be welcomed as it is respectfully submitted that the courts may have gone too far in restricting the ability of private parties to exclude statutory rights under the ACL.

Secondly, the vendor argued that the statements about the prospective profitability of the relevant subcontract were not forward-looking statements but statements as to the “nature, quality, character or capability” of the relevant subcontract. The vendor argued that the relevant representation in relation to gross profit margin with respect to the Tindal subcontract was in the nature of an opinion. The court rejected this argument pointing out that a representation which is in respect to a future matter can include a representation taking the form of opinion or prediction that an event will occur in the future, consistent with prior authority.

CONCLUSION

Claims regimes in private M&A deals are important and need to be carefully considered when purchasers are proposing their cause of action. The terms of those provisions are of course also very important.

The Federal Court’s recent decision also demonstrates that for anyone thinking that statutory actions for misleading or deceptive conduct can be made and enjoyed at will, that is not the case, and care is needed to methodically work through the various limbs of those actions so the desired outcome is achieved.


  1. [2023] FCA 495.

Key contacts

Tony Damian photo

Tony Damian

Partner, Sydney

Tony Damian
Amelia Morgan photo

Amelia Morgan

Partner, Sydney

Amelia Morgan