Falling markets & misleading conduct

In rising markets an investor induced by overly optimistic statements by a vendor or its agent as to the returns expected from an investment will often have little commercial incentive to sue.   On the other hand, in falling markets, the incentive to sue may become irresistible.

The decision of White J, sitting at first instance in the New South Wales Supreme Court, in Zhang v VP302 SPV & Ors [2009] NSWSC 73, provides a chilling and expensive reminder to vendors of financial and other products of the risks.

At the height of the Sydney property market in 2003 two purchasers entered a $1.07 million contract to buy 'off the plan' strata units.  Completion was due within 14 days after the vendor served notice of registration of the strata plan.  The strata plan was registered in July 2005 and the vendor appointed 21 July 2005 for settlement.  By that time, the Sydney property market had fallen very substantially.  The purchasers refused to complete.  They demanded the return of their $100,000 deposit.  They said that they had been induced to enter the contract because of misleading and deceptive advertising by the vendor and its real estate agent.  That advertising touted the development as 'the hottest investment location in Sydney' and promised a 'one year 5% rental guarantee'.  The advertising quoted from an article in the Herald Sun newspaper written one and a half years earlier, in February 2002.   The journalist had predicted that values in the suburb were going to 'double within five years'.

The purchasers sought declarations from the NSW Supreme Court that the contract be rescinded.  The purchasers argued that there was no reasonable basis for a prediction that the value of the property would double in five years. 

The vendors and their real estate agent defended on the grounds that the Herald Sun article was 'puffery'.  They said that the purchasers had failed to establish that they relied on the extract from the Herald Sun's article.  They said that the purchasers knew that there was a risk that property prices might fall.

White J found that the evidence of the purchasers was unreliable in many respects.  Despite that finding he was nonetheless satisfied that the purchasers believed that properties in the suburb would double within five years.   The vendor's advertising, by quoting the Herald Sun article, had contributed to the purchasers holding that belief.  That belief had induced the purchasers to enter the contract.  Accordingly, the purchasers were entitled to an order for rescission of the contract and return of the $100,000 deposit. 

The recent dramatic falls in investment and property markets suggests that we may well see an increase of litigation arising from optimistic statements made in buoyant economic times about anticipated returns on investments.  If those making the statements did not have reasonable grounds for the statements and, if the losses are significant, then there may be fertile grounds for an investor to litigate.

Investors who lose out because of misleading and deceptive conduct have a smorgasbord of available remedies.

On the other hand, for vendors of property, financial and other products, the Zhang decision is a sober reminder, in falling markets and tough economic times, of:

  1. the benefits of vigorous Trade Practice Act compliance programs;

  2. the need to be litigation ready