How to Anticipate and Avoid Business Purchase Contract Litigation

Business purchase contracts are often complex agreements involving significant financial stakes, multiple parties, and intricate terms. Despite the best efforts of all involved, these contracts can sometimes lead to disputes that escalate into litigation. Buyers and sellers should understand the common causes of action that arise from these disputes, the types of remedies that can be sought and the proactive actions that can avoid litigation.

Several causes of action can arise from business purchase contracts, such as these:

1. Breach of contract — This is the most common cause of action in business purchase disputes. A breach occurs when one party fails to fulfill its contractual obligations, whether it’s failing to make payment, transferring ownership or adhering to non-compete clauses.
2. Fraudulent misrepresentation — One party might allege that the other provided false information or intentionally concealed material facts during the negotiation process. For example, a seller might misstate the business’s financial health, leading the buyer to overpay.
3. Breach of warranty — Business purchase contracts often include warranties regarding the condition of assets, the accuracy of financial statements, and the legality of the business operations. If these warranties prove false, the affected party may seek damages.
4. Breach of fiduciary duty — In cases where a fiduciary relationship exists, such as between a broker and a client, a breach of duty can be alleged if the fiduciary acts against the best interests of the principal.

When business purchase disputes lead to litigation, the party claiming injury may seek various remedies. Some contracts include a liquidated damages clause, specifying a preset amount to be paid in the event of a breach. These damages are enforceable if the amount is reasonable and not punitive. Alternatively, a party may claim compensatory damages, for actual losses incurred due to the breach, or consequential damages, for losses that are a foreseeable result of the breach, such as lost profits. Or a party may seek specific performance, an order compelling the other party to fulfill its contractual obligations. This remedy is often sought when the contract’s subject matter is unique, such as a one-of-a-kind business.

To minimize the risk of disputes erupting into litigation, parties should take the following steps:

1. Thorough due diligence — Conducting comprehensive due diligence before finalizing the contract can help identify potential issues and mitigate risks. This includes reviewing financial records, verifying ownership of assets and assessing the business’s legal obligations.
2. Clear and detailed contracts — Ensure that the purchase agreement is clear, detailed, and unambiguous. It should address all critical aspects of the transaction, including payment terms, warranties, representations and dispute resolution mechanisms. The lack of “definite terms” is a common problem with client- prepared agreements. My rule is: “If you cannot point to the provision that has been breached, then you don’t have a valid and enforceable contract.” At a minimum, you have ambiguity, and ambiguity costs time and money. 
3. Mediation or arbitration clauses — Including dispute resolution provisions in the contract can provide a less adversarial and more cost-effective alternative to going to court. However, these options are not appropriate for some cases. The choice whether to include mediation or arbitration in your agreement is extremely important. The pros and cons should be discussed with an attorney before deciding that question. 

Engaging an experienced business purchase attorney during negotiations and drafting of the contract can help prevent potential disputes and protect your interests.

The Law Offices of Donald W. Hudspeth, P.C. in Phoenix, Arizona takes an authoritative, practical approach to business purchase dispute litigation. To schedule a consultation, call our office at 866-696-2033 or contact us online.