Business Purchase Gone Wrong: Misrepresentation Claims Against a Seller in BC

Sometimes the problem only appears after closing: revenue that was overstated, a key customer who had already given notice, equipment that was never paid for, or a tax debt nobody mentioned. When that happens, the question is not only whether the seller misled you, but which legal route the purchase agreement leaves open.

This article is for buyers who have already closed. It explains the usual claims against a seller in BC, how the agreement shapes them, and the deadlines that can end a claim before it starts.

Start with the purchase agreement

Most of your rights after closing are set by the agreement you signed. Before deciding anything, pull out the signed version and its schedules and look for:

• Representations and warranties: the seller's statements of fact about the business, such as the financial statements, contracts, employees, taxes and the condition of assets.
• Survival period: how long after closing those statements can be relied on. Many agreements set a period of months or a few years, sometimes different for tax or title matters.
• Indemnity: the seller's promise to pay certain losses, and the procedure for making a claim, including written notice and deadlines.
• Limits: caps on the total the seller can be made to pay, minimum thresholds before a claim can be made, and exclusions.
• Holdback or escrow: part of the price kept back to cover claims, and any right to set off against payments still owed to the seller.
• Entire agreement clause: a term saying the written agreement is the whole deal, which can affect claims based on things said outside it.

Our article on key terms of a business purchase agreement explains these clauses from the drafting side.

Breach of warranty

If a representation in the agreement turns out to be untrue, the usual claim is for breach of contract: damages to put you in the position you would have been in had the statement been true. You will need to show which warranty was breached, what the true position was, and what loss it caused, often with an accountant's help where the issue is earnings or inventory. The general principles are covered in our article on breach of contract in BC.

Indemnity claims

An indemnity can be more direct than a damages claim, because the seller has already agreed to cover a defined kind of loss, such as pre-closing taxes or a specific lawsuit. But indemnities are usually procedural. Missing a notice requirement, failing to give the seller a chance to defend a third-party claim, or settling without consent can reduce or defeat the claim. Read the indemnity section closely before you respond to any third party.

Misrepresentation outside the contract

Not every false statement made during negotiations ends up as a written warranty. A buyer may also have a claim in misrepresentation, which comes in several forms:

• Fraudulent misrepresentation: a false statement the seller knew was false, or made recklessly, that induced you to buy and caused loss. In Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8, the Supreme Court of Canada treated inducement as one of the elements of civil fraud. Fraud is a serious allegation and must be supported by evidence.
• Negligent misrepresentation: an inaccurate statement made without reasonable care, in circumstances where the seller owed you a duty of care. In Queen v. Cognos Inc., 1993 CanLII 146 (SCC), the Supreme Court of Canada recognized liability for negligent pre-contract statements and considered whether the contract's terms limited it. Your agreement's wording, including any entire agreement or disclaimer clause, will matter.
• Innocent misrepresentation: a false statement made honestly and with care. Remedies are narrower.

Rescission, which means undoing the sale and returning both sides to where they started, is sometimes raised, but after closing it is often impractical. The business may have changed, assets may have been sold and the price spent. Damages are the more common goal, and a lawyer can advise whether rescission is realistic on your facts.

The deadlines: contract periods and the Limitation Act

There are two sets of deadlines, and both matter.

First, the contract. Survival periods and notice requirements in the agreement can be shorter than the statutory limitation period. A claim notice sent after the agreed period may be too late even if a lawsuit would otherwise be in time.

Second, the Limitation Act. A court proceeding must generally be started no more than two years after the day the claim is discovered (s 6(1)). A claim is discovered on the first day you knew or reasonably ought to have known that loss occurred, that it was caused by an act or omission, that it was the act or omission of the person you would sue, and that a court proceeding would be an appropriate way to seek a remedy (s 8). There is also an ultimate period of 15 years after the act or omission, subject to the Act's exceptions (s 21(1)). For more detail, see our article on limitation periods in BC.

What to do now

• Preserve evidence. Keep the data room index, disclosure documents, emails, financial statements and notes of what the seller said, and when.
• Do not stop payments on your own. If you still owe the seller money, withholding it without a contractual right of set-off can put you in breach. Get advice first.
• Give notice properly. Follow the agreement's notice clause: method, address and content.
• Quantify the loss. An accountant may be needed to measure the difference between what was represented and what you received.
• Consider the forum. Depending on the amount, the claim may belong at the Civil Resolution Tribunal, Small Claims or the Supreme Court. Our article on where your BC dispute belongs explains the options.

A well-prepared demand letter often comes before any lawsuit and can lead to a negotiated outcome, including a release of holdback funds.

Bought a business that isn't what you were told? Check your deadlines first

Our litigation lawyers can review your purchase agreement, identify which claims are open to you and the deadlines that apply, and pursue warranty, indemnity or misrepresentation claims against the seller.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.