Arbitrators in New York ruled in April this year that Schulz's holding company had systematically misled Buffett's company by inflating Schultz's earnings. This had been achieved by creating fake invoices and falsifying balance sheets. Wilhelm Schulz was worth no more than 157m Euros leaving Buffett's company out of pocket to the tune of 643m Euros. The New York arbitrators have since ordered Schulz's holding company to make up the difference to Buffett's company.
The Schulz decision was in accordance with the law of the State of Delaware. But what could be done if a case like this were to occur in Scotland? In Scots law, if you are induced to enter into a contract by a factual misrepresentation made by the other party to the contract, you may be able to set aside the contract and/or claim damages. The availability of damages depends on whether the misrepresentation was fraudulent, negligent or innocent.
The situation facing Warren Buffett's company was clearly a fraudulent misrepresentation. The party doctoring invoices or manufacturing entirely fake orders knows they are false. In this situation, the innocent party can seek to have the contract set aside. In addition, the innocent party can seek damages for losses sustained as a result of the fraud. If the innocent party does not want to have the contract set aside, the contract can be left in place and the innocent party can make a claim for damages. It appears that is what Buffett's company did in New York and succeeded in obtaining an award of damages for the balance of the purchase price paid above Schulz's actual worth.
A person may make a negligent misrepresentation if he has not taken reasonable care to ensure the statement is factually correct. If a party has been induced to enter into a contract due to a negligent misrepresentation, he may seek to have the contract set aside. He may also be able to claim damages for any losses. Damages are also available without needing to have the contract set aside.
An innocent misrepresentation is one that is made honestly and with reasonable care. In this situation, the only remedy available is to have the contract set aside. The maker of the innocent misrepresentation is not liable to pay damages to the other party.
A word of warning - proving fraud is often a challenge. In the Schulz case, an anonymous tip off by a whistleblower resulted in investigation into the transaction. However, a tip off or a suspicion that all is not as it seems is not likely to be enough in itself to demonstrate fraud. In order to persuade the arbitrators that a fraudulent misrepresentation had been made, extensive expert evidence was required into Schulz's customer order system and where it had been doctored. Evidence from forensic accountants was also required to demonstrate the true value of Schulz. Expert evidence of this sort does not come cheap.
