Dental Misrepresentation: Failure to Declare
When selling your business, it is important to be clear about any and all issues to the buyer, even though this may give the buyer an opportunity to negotiate a lower purchase price. It could help to save you from a lot of unwanted issues in the future.
It is likely the defendants in the recent case of Dhaliwal v Hussain & another  EWHC 2655 (Ch) came to regret something they chose not to say after the Chancery Division of the High Court decided that they had made misrepresentations about their business with the intent of deceiving the claimant (the buyer).
In December 2007, the claimant dentist purchased a dental practice for £625,000. Little did she know, the practice had been raided during an investigation into alleged fraud by the NHS dental fraud team in January 2005, leading to Wolverhampton primary care trust (PCT), as then known, taking the decision not to award further contracts to the defendants.
This information didn’t come to light during the due diligence process, which is a key part of the sale and purchase of a dental practice. During this process, the buyer has the opportunity to raise enquiries about the business and its affairs. The sellers reply to these enquiries, which helps to flush out any problems at an early stage and gives the buyer the information it needs to make an informed decision about proceeding with the purchase. It also gives protection to the sellers because making any issues known to the buyer (although this may lead to further negotiation) may ultimately help to prevent the buyer bringing a claim about a problem it knew it would inherit.
When asked to provide “Particulars of any change in the Business or in the manner of carrying it on during the last 3 financial years”, the defendants had replied only that the “Practice was changed from mixed private and NHS to purely private in April 2006”. The claimant took this to mean the practice had carried out no NHS work after March 2006 and, in turn, that the £404,000 turnover in the accounts provided to her had been received from privately paying patients only.
In fact, following the raid by the PCT and the defendants’ unsuccessful appeal against the PCT’s decision, the PCT did award Personal Dental Services contracts to five individual dentists who had worked as associates at the practice. These individuals entered into arrangements whereby the fees were shared with the defendants, but each contract holder had subsequently left the practice. The effect of this meant the turnover of £404,000 included approximately £174,000 of NHS work and £230,000 of private work, and the trading position of the practice had substantially deteriorated because the ability to account for NHS work had been lost.
Finding in favour of the claimant, the court held the defendants had known and intended their reply to convey to the claimant that the practice had become wholly private from 1 April 2006 with only private fees in the subsequent period. This, the court held, was a false representation meant to deceive the claimant and, had she been aware of the true position of the practice, it would likely make a significant difference to the price the defendants could negotiate.
The claimant was entitled to recover damages of £140,000 for the misrepresentation (being the excess paid for goodwill), consequential losses of £94,643.78 and £1,000 for a separate breach in relation to removal of stocks.
It’s a timely reminder that it is vital to ensure replies to pre-contract enquiries are accurate and detailed enough to enable healthy dialogue.
If you would like further information on this topic, please contact Ross Hayward or you can call us on 0345 070 6000.