For many years, Amelia Airheart ran a boutique hotel in the Perth Hills. Around three years ago, Amelia decided to sell the business and retire. She advertised the business in the local newspaper, describing it as ‘an exciting business opportunity’. Bonnie Boeing saw the advertisement and expressed an interest in buying the hotel. At a meeting, Amelia gave Bonnie the financial records of the business and told her that it was very successful due to its loyal customer base. She added: ‘the rooms are getting a little shabby but with a spruce up and some good marketing you will be able to grow the business even further’. The financial records for the business showed that profits had declined somewhat in recent years but were still healthy. In fact, Amelia had doctored the records. The business had been running at a loss for many years and Amelia was desperate to get it off her hands. Bonnie agreed to buy the hotel for the full asking price of $5 million. She then invested a further $500,000 renovating each of the ten rooms. She replaced all of the carpets, light fittings and curtains, and repainted every room. Bonnie also spent $250,000 updating the plumbing throughout the hotel. When the renovations were complete, she paid another $50,000 for a full page advertisement in the local newspaper, proudly announcing that the hotel was under new management and had re-opened for business. For the next few months, business was slow. By the end of Bonnie’s first year in business there were so few bookings that she made a substantial loss. The losses increased in the next year, and the next. In despair, Bonnie telephoned Amelia. She said: ‘I’m failing here! Can you help?’ Amelia replied: ‘Afraid not. I knew that hotel was a loser. I hadn’t made a profit for years’. Shocked, Bonnie said: ‘I can’t believe you lied to me. I want my money back – now!’ However, Bonnie struggled on for another year before seeking legal advice. Her lawyer told her to immediately walk away from the business and commence proceedings against Amelia. He drafted the writ for her, claiming ‘rescission and/or damages for deceit’. Amelia, meanwhile, invested the $5 million sale price for the hotel in an acreage of land in the forest. She planned to build a large house on the block in which she would see out her retirement. She contracted with Charles Chindberg to construct the house. Charles subcontracted the whole job to Donald Douglas. The contract between Charles and Donald provided for a contract price of $500,000, with $100,000 to be paid up-front and the balance at completion. Donald commenced work, even though Charles had not paid the $100,000 instalment. A couple of days into the job, Donald discovered that the site sat on a bed of caprock which would have to be removed. He informed Charles, saying: ‘This will blow out the budget. We’re talking at least an extra $50,000’. Charles replied: ‘Ah - these things happen. I’ll run it past Amelia but your estimate sounds OK’. Donald didn’t hear back from Charles so got on with the caprock removal. The caprock turned out to be even more extensive than Donald had anticipated and cost $100,000 to remove. About a year later, Donald finished the job and sent Charles an invoice for $600,000. Charles forwarded it to Amelia who exclaimed: ‘This isn’t what we agreed! I’m not paying this!’ Not having been paid by Amelia, Charles was unable to pay anything to Donlad. Shortly afterwards, Charles became insolvent. Answer the following questions: 1. Can Bonnie rescind her contract with Amelia and, if so, what can she recover? 2. Does Donald have a claim for restitution against Amelia or Charles and, if so, in what amount?
Question
For many years, Amelia Airheart ran a boutique hotel in the Perth Hills. Around three years ago, Amelia decided to sell the business and retire. She advertised the business in the local newspaper, describing it as ‘an exciting business opportunity’. Bonnie Boeing saw the advertisement and expressed an interest in buying the hotel. At a meeting, Amelia gave Bonnie the financial records of the business and told her that it was very successful due to its loyal customer base. She added: ‘the rooms are getting a little shabby but with a spruce up and some good marketing you will be able to grow the business even further’. The financial records for the business showed that profits had declined somewhat in recent years but were still healthy. In fact, Amelia had doctored the records. The business had been running at a loss for many years and Amelia was desperate to get it off her hands. Bonnie agreed to buy the hotel for the full asking price of 500,000 renovating each of the ten rooms. She replaced all of the carpets, light fittings and curtains, and repainted every room. Bonnie also spent 50,000 for a full page advertisement in the local newspaper, proudly announcing that the hotel was under new management and had re-opened for business. For the next few months, business was slow. By the end of Bonnie’s first year in business there were so few bookings that she made a substantial loss. The losses increased in the next year, and the next. In despair, Bonnie telephoned Amelia. She said: ‘I’m failing here! Can you help?’ Amelia replied: ‘Afraid not. I knew that hotel was a loser. I hadn’t made a profit for years’. Shocked, Bonnie said: ‘I can’t believe you lied to me. I want my money back – now!’ However, Bonnie struggled on for another year before seeking legal advice. Her lawyer told her to immediately walk away from the business and commence proceedings against Amelia. He drafted the writ for her, claiming ‘rescission and/or damages for deceit’. Amelia, meanwhile, invested the 500,000, with 100,000 instalment. A couple of days into the job, Donald discovered that the site sat on a bed of caprock which would have to be removed. He informed Charles, saying: ‘This will blow out the budget. We’re talking at least an extra 100,000 to remove. About a year later, Donald finished the job and sent Charles an invoice for $600,000. Charles forwarded it to Amelia who exclaimed: ‘This isn’t what we agreed! I’m not paying this!’ Not having been paid by Amelia, Charles was unable to pay anything to Donlad. Shortly afterwards, Charles became insolvent. Answer the following questions:
- Can Bonnie rescind her contract with Amelia and, if so, what can she recover?
- Does Donald have a claim for restitution against Amelia or Charles and, if so, in what amount?
Solution
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Bonnie can potentially rescind her contract with Amelia based on the grounds of fraudulent misrepresentation. Amelia knowingly provided false information about the profitability of the hotel, which Bonnie relied upon to make her decision to purchase the business. If the contract is rescinded, Bonnie would be put back in the position she was in before the contract was made. This means she could potentially recover the purchase price of $5 million. However, she may not be able to recover the additional costs she incurred for renovations and advertising as these are consequential losses.
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Donald may have a claim for restitution against Charles for unjust enrichment, as Charles would be benefiting from Donald's work without paying for it. The amount would be the contract price of 100,000 for the caprock removal, totaling $600,000. However, since Charles is insolvent, it may be difficult for Donald to recover this amount. As for Amelia, Donald may not have a direct claim against her as his contract was with Charles, not Amelia. However, depending on the jurisdiction, he may be able to make a claim against her property if he can establish that he has a builder's lien or similar right.
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