Legal Updates

A business party which is the only one investing funds in a project and relies without due diligence review on presentation of the other can not later contend fraud

January 29, 2022

Two entrepreneurial entities entered into an agreement to collaborate on a project to reenforce two residential buildings as part of a TAMA38 project. After the project failed, the one contended that the other is responsible for its damages due to misrepresentations regarding the project's profitability and feasibility.

The Court rejected the contentions and held that there is no liability for damages caused due to the failure of the project. Binding representations in an agreement are those that deal with a description of past or present facts or statements about existing data. In contrast, statements and representations that are of the nature of future forecasts, assessments or future promises, including future business plans, are not a misrepresentation as they represent a future estimate, assessment or belief. A business party entering into an agreement cannot blindly trust the representations of the other party, which may be optimistic, and is required to conduct independent and objective due diligence as to the probability of the project, both on planning side and on the economic side, especially when it is the only one bearing the financial costs. Here, the representations alleged to have been false representations are future presentations, and therefore cannot be regarded as binding. In addition, it appears that there have been a blind reliance on the representations without conducting objective independent checks as to their correctness despite the fact that the party contending damage was the only one who invested funds in the project. The mistake made is a mistake regarding the viability of the transaction, which is a mistake in relation to the risk that the party took upon itself and therefore cannot deny and obligate the other for the damages caused, once such risk materialized.