Inducement in Fraudulent Misrepresentation Cases

August 03, 2018

The decision in BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises, Inc. [2018] EWHC 1857 (Comm) is of interest in several respects. It provides a warning about giving estimates as negotiating devices which are not based on an honestly held belief as to their accuracy. Importantly it also clarifies the test applicable to establish inducement for the purposes of a fraudulent misrepresentation claim: in fraudulent misrepresentation cases a weaker test is to be applied to the question of inducement than in cases of negligent misrepresentation, so that it is sufficient to show that but for the representation the representee might have acted differently, not that it would have acted differently. In cases of fraudulent misrepresentation very strong evidence is required to rebut the presumption that but for the representation the representee would have acted differently. 

The court also reaffirmed the decision in Raiffeisen Zentralbank Osterreich v Royal Bank of Scotland [2010] EWHC 1392 that in misrepresentation cases the representation needed only to be a factor in the representee’s decision to enter into the contract, not the sole factor. 

The decision is also of interest in the way in which the court awarded rescission for the fraudulent misrepre-sentation which was found to have induced a revised contract. Since the effect of granting rescission would resurrect the original contract, the court sought to achieve a ‘practically just’ result by depriving the repre-sentor of the benefit received as a result of the misrepresentation, rather than requiring restitution of the to-tal price paid under the contract. 

What Are the Practical Implications of This Case? 

This case emphasises the difficulties presented to a party facing a claim of fraudulent misrepresentation. Assuming that a representee can establish that but for the representation it might not have entered into the contract, a presumption that it relied upon the representation in entering into the contract will arise. It is for the representor to overcome the presumption that the fraudulent misrepresentation induced the contract by showing that the representee would have entered into the contract even if the representation had not been made. 

Great care must be taken in pre-contract negotiations not to misrepresent facts in an effort to improve a bargaining position. There is a great deal of difference between comments often made in negotiations (for example as to a party’s ‘bottom line’), which are unlikely to be actionable, and more specific statements such as those here (which related to an expected costs increase) which may well give rise to a claim for fraudulent misrepresentation. 

As this case showed, the courts will be prepared in suitable cases to grant rescission in a creative way so as to achieve a ‘practically just’ result and one which prevents a representor from retaining benefit obtained as a result of the misrepresentation. 

What was the Background? 

The defendant, Rembrandt Enterprises, Inc. (Rembrandt), a US supplier of egg-based products, entered into a contract for the supply of egg products with the claimant, BV Nederlandse Industrie Van Eiprodukten (NIVE), based in the Netherlands. NIVE agreed to supply the egg products by a contract entered into in May 2015 (the original contract). The price was renegotiated upwards in June 2015 (the revised contract). In Janu-ary 2016, Rembrandt formed the view that NIVE’s egg products did not comply with US regulations and re-jected the products.NIVE claimed damages for breach of contract, including damages in respect of egg white powder supplied by a third party supplier. Rembrandt raised two defences: 

  • NIVE fraudulently misrepresented the costs of complying with the inspection procedures required by the US regulatory authorities, and 
  • NIVE was in breach of one or more warranties Rembrandt counterclaimed for the price paid for the egg products, minus the price obtained on resale. 

What Did the Court Decide? 

Fraudulent Misrepresentation 

Teare J found, on the facts, that NIVE had fraudulently misrepresented the estimated costs of complying with the regulations and accordingly there was a strong presumption that the representation made by NIVE induced Rembrandt to enter into the revised contract in the sense that, but for the representation it would not, or might not, have agreed to the requested price increase. The heavy evidential burden shifted to NIVE to rebut this presumption and it needed to show that Rembrandt would have entered into the contract had there been no representation. NIVE was unable to show that Rembrandt would have agreed to the price in-crease even if the fraudulent misrepresentation had not been made and the judge therefore granted the re-scission of the revised contract. 

The effect of the rescission of the revised contract was that the original contract remained operative and NIVE was ordered to repay to Rembrandt the additional price paid by Rembrandt pursuant to the revised contract. This was found to be the ‘practically just’ outcome by removing from NIVE the benefit received as a result of the misrepresentation, rather than requiring full restitution of the total price which Rembrandt had paid under the revised contract. 

Breach of Warranty Transferred loss 

Rembrandt’s defence of breach of warranty failed and, as a result, NIVE was entitled to damages from Rembrandt, assessed by reference to the prices agreed in the original contract. 

Transferred loss 

NIVE was unable to recover the third party supplier’s losses. In order for the principle of transferred loss to apply, there had to have been an intention, known to Rembrandt, to benefit the third party. In the present case, NIVE did not communicate to Rembrandt its intention to use the third party supplier before entering into the original contract and the third party supplier had no direct rights against Rembrandt.

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