Text 3: excerpt from the judgment in Ruxley Electronics and Construction Ltd v. Forsyth  AC 344
It is a common feature of small building works performed on residential property ... that comparatively minor deviations from specification or sound workmanship may have no direct financial effect at all. Yet the householder must surely be entitled to say that he chose to obtain from the builder a promise to produce a particular result because he wanted to make his house more comfortable, more convenient and more conformable to his own particular tastes; not because he had in mind that the work might increase the amount which he would receive if, contrary to expectation, he thought it expedient in the future to exchange his home for cash.To say that in order to escape unscathed, the builder has only to show that to the mind of the average onlooker, or the average potential buyer, the results which he has produced seem just as good as those which he had promised would make a part of the promise illusory, and unbalance the bargain.
Case Study 1 Contract law
The facts of the case
Your law firm has asked you to review the following company law case in preparation for a meeting with the other party's lawyer.
Read this description of the facts of the case. What is the legal issue here?
Two years ago, Alex and Lesie Ballentine decided to sell their company, Solaris Energy (America), Inc., by public offering. A statutory registration statement (a carefully prepared set of documents, including a prospectus) was filed with the US Securities and Exchange Commission. However, the public sale did not go ahead, and the company was sold privately to Cordeaux Gabelle, Inc.. The purchase price included a payment reflecting an estimated increase in the company's net worth from the end of the previous financial year. Because hard financial data was unavailable, the contract stated that if a year-end audit and financial statements showed a difference between the estimated and actual increased value, the amount paid would be increased or decreased by the appropriate amount to reflect the actual value.
An audit completed six months after the sale revealed that the value of the company had been overestimated by approximately $1.2m. The buyers were therefore entitled to recover an adjustment. However, Cordeaux Gabelle has been advised that it may be entitled to a remedy under 12a (2) of the Securities Act 1933, which gives buyers an express right of rescission against sellers who make material misstatements or omissions 'by means of a prospectus'. They have also been advised that an alternative remedy may be available under section 11 of the act.
Cordeaux Gabelle is claiming damages of $14.6m. The Ballentines argue that section 11 is only relevant in the case of a public offering. They also argue that a contract between a private buyer and seller is not a 'prospectus' as the term is used in section 12(a)(2) of the Securities Act, therefore section 12(a)(2) also only applies to public offerings, and not to private sales.
Task i: Speaking
Divide into two groups, with one group representing Alex and Leslie Ballentine and one group representing Cordeaux Gabelle.
1 Prepare for negotiations with the other party. You should:
O identify the legal issues of the case and determine arguments for
your side; 0 list the strengths and weaknesses of your side of the case; 0 list the strengths and weaknesses of the other side of the case; 0 decide which parts of the relevant legal documents most strongly support
your case and can be used to argue against the other party's case; 0 make notes for the negotiation: What are your goals? What are you
willing to give? What are you not willing to give?
2 Pair up with a representative of the other party and attempt to negotiate a settlement.
Task 2: Writin
Write a letter of advice I one of the parties (your choice), in which you outline the legal issues raised by the case, refer to relevant statutes or related cases and providi your opinion as to the likely outcome of the case.
3 Report the results of your negotiations to the class.
Relevant legal documents
Text i: an outline of civil liabilities under the US Securities Act of 1933, sections 11 and 12
To claim under either s.ll or s.12, the buyer must prove a material misstatement or omission of a material fact. Section 11 liability flows from the requirements for filing a registration statement. Liability under s.12(a) (2) flows from the requirement to distribute prospectuses. Under sections 11 and 12, the issuer of a registered security may be liable to the buyer for damages if the sale of the security included a reference to false or misleading information. The buyer does not have to show any reliance on the false statements. The issuer is strictly liable (liable without fault). This liability is subject to a defence of reasonable care; the issuer may avoid liability if it can be shown that reasonable care was taken in providing information concerning the security in dispute.
Text 2: excerpt from the Supreme Court judgment in Arthur L Gustafson, et al. v. Alloyd Company, Inc. fka Alloyd Holdings, Inc, et al. [February 28,1995]
It is understandable that Congress would provide buyers with a right to rescind, without proof of fraud or reliance, as to misstatements contained in a document prepared with care, following well-established procedures relating to investigations with due diligence and in the context of a public offering by an issuer or its controlling shareholders. It is not plausible to infer that Congress created this extensive liability for every casual communication between buyer[s] and seller[s] ... It is often difficult, if not altogether impractical, for those engaged in casual communications not to omit some fact that would, if included, qualify the accuracy of a statement. We find no basis for interpreting the statute to reach so far.
Text 3: excerpts from an article discussing the decision in Gustafson