In Kingspan Environmental Ltd v Borealis A/S(1) the Commercial Court considered the approach to the applicable law for misrepresentation claims where there is a closely connected claim in contract.
The defendant Borealis companies - a Danish parent and a UK subsidiary - sold a polymer called borecene to the claimant companies, Kingspan. The invoices that Borealis issued for the sales of borecene were expressed to be subject to Borealis's general terms and conditions of sale, which excluded all conditions and warranties as to the quality of the goods or their fitness for any purpose.
Kingspan used the borecene in the manufacture of oil tanks by a process called 'rotomoulding'. The oil tanks were guaranteed for 10 years and were designed for external use. A substantial proportion of the oil tanks cracked before the 10 years of use had elapsed, with the result that they could not be used for their intended purpose.
Kingspan brought proceedings against Borealis in the English court, seeking damages - originally estimated at £100 million - for breach of contract. Kingspan alleged that borecene was not fit for the purpose of making the oil storage tanks because of its inadequate resistance to ultraviolet (UV) light.
There was a dispute as to which of the Borealis entities had contracted with Kingspan. This was significant since Clause 8 of Borealis's terms and conditions provided that its terms were governed "by the law of the contract where Borealis [was] domiciled". Kingspan disputed the applicability of Borealis's standard terms. It also contended that its contract was with Borealis UK and, accordingly, that even if Borealis's terms applied, the contract was subject to English law. Borealis submitted that its Danish parent company was the contracting party.
In addition to its contractual claim, Kingspan alleged that Borealis had made the following misrepresentations during the course of pre-contractual negotiations, which had induced the purchase of the borecene:
- that borecene was suitable for use in the manufacture by rotomoulding of the oil tanks;
- that borecene was either fully UV stabilised or UV stabilised; and
- that borecene was expected to meet the Oil Firing Technical Association (OFTEC) standard of weather resistance, and that the addition of green pigment would give the oil storage tanks a lifetime of 10 years.
Applicable law of the contract
The court found on the evidence that the Danish parent company was clearly the seller/supplier of the borecene. The Danish entity had issued the invoice and was entitled to payment from Kingspan for the goods.
The court also found on the facts that, as a matter of English law, Borealis's terms had been incorporated and that they applied. Kingspan had received and signed hundreds of invoices, knowing that they were subject to general terms and conditions, to which no objection had been raised. Accordingly, Borealis had been entitled to believe that its terms had been accepted.
However, the court considered that Danish law governed the question of whether the terms had been incorporated.
As Danish law has no doctrine of misrepresentation or tort of negligent misstatement, Kingspan argued that the effect of incorporating Borealis's terms - and thus making the contract subject to Danish law - was to deprive it of a freestanding claim for misrepresentation. Kingspan argued that it could not reasonably have been expected to know about this outcome. It further argued that if Danish law applied, it would not have the protection of the Unfair Contract Terms Act 1977.
The court was not impressed by either argument. It considered that it was for Kingspan, as a sophisticated commercial entity, to have made the appropriate investigations in order to understand the contractual position. In any event, the contracts were international sales contracts for the purposes of Section 26 of the Unfair Contract Terms Act, meaning that the limits which that act imposes on the ability of contracting parties to exclude or restrict liability would not have applied.
No breach of contract
As the contracts contained no express terms about quality, Kingspan could rely only on a breach of the terms implied by the United Nations Convention on Contracts of the International Sale of Goods 1980 Part 1, Article 35(2) (which resemble the requirements of satisfactory quality and fitness for purpose contained in Sections 14(2) and (3) of the Sale of Goods Act 1979) in order to establish breach of contract. However, the court found no evidential basis to support Kingspan's assertion that borecene was unfit for purpose. On the contrary, the court found that borecene was suitable for use in external fuel tanks and that the failure of Kingspan's fuel tanks was instead the result of poor design, deficient processing and inadequate quality control.
Applicable law for claims in misrepresentation
Given the court's decision that Danish law applied to the contractual claims, the issue was whether Danish law also applied to the claims for misrepresentation and negligent misstatement or whether English law applied.
Part III of the Private International Law (Miscellaneous Provisions) Act 1995 governs the choice of law in cases of tort or delict occurring after May 1996 and before January 11 2009.(2) As the borecene was supplied in 2002 and 2003, the 1995 act applied to the acts in question.
The relevant parts of Section 11(2) of the act provide as follows:
"Choice of applicable law: the general rule
(1) the general rule is that the applicable law is the law of the country in which the events constituting the tort or delict in question occur.
(2) where elements of those events occur in different countries, the applicable law under the general rule is to be taken as being…
(c) in any other case, the law of the country in which the most significant element or elements of those events occurred."
In the present case the events occurred in different countries, but the most significant elements of the tort took place in England. Accordingly, under the general rule, English law was the proper law. However, Section 12 of the act varies the general rule as follows:
"12 Choice of Applicable law: displacement of the general rule
(1) If it appears, in all the circumstances, from a comparison of:
(a) the significance of the factors which connect a tort or delict with the country whose law would be the applicable law under the general rule; and
(b) the significance of any factors connecting the tort or delict with another country,
that it is substantially more appropriate for the applicable law for determining the issues arising in the case, or any of those issues, to be the law of the other country, the general rule is displaced and the applicable law for determining those issues or that issue (as the case may be) is the law of that other country.
(2) The factors that may be taken into account as connecting a tort or delict with a country for the purposes of this section include, in particular, factors relating to the parties, to any of the events which constitute the tort or delict in question or to any of the circumstances or consequences of those events."
Kingspan submitted that it was inappropriate to displace English law for Danish law for the following reasons:
- Danish law does not have a doctrine of misrepresentation or negligent misstatement;
- The relevant Kingspan entities were incorporated in Ireland and Northern Ireland, and Borealis had acted through Borealis UK, an English company;
- The representations that had induced the purchase of the borecene had been made and relied on in the United Kingdom;
- None of the events giving rise to the claim for misrepresentation had taken place in Denmark; and
- Borealis's terms and conditions referred only to the general terms being governed by the law of Borealis's domicile, although they could also have specified that the parties' relationship and any pre-contractual representations were subject to the law of domicile, if that had been intended.
Kingspan also referred to Base Metal Trading Ltd v Shamurin(3) as authority that there is nothing novel in applying different laws in relation to different but related causes of action.
Borealis submitted that Danish law should govern the claims in both misrepresentation and contract, as the parties had agreed by the terms of the contract to be governed by Danish law 'for whatever reason'. They submitted that it would be irrational for a contractual claim for lack of fitness for purpose to be subject to Danish law while a parallel claim based on misrepresentation or misstatement as to fitness was subject to a different law. The appropriate law governing the effect, if any, of any misrepresentation should be the law of the contract itself.
The court referred to Trafigura Beheer BV v Kookmin Bank Co,(4) in which it was held that the country in which the most significant element of the events constituting the tort occurred was Singapore. Therefore, Singapore law would apply under the general rule. However, the judge in that case went on to displace the general rule on the basis that English law was the law that the parties had chosen to govern their contractual relationships and therefore, by implication, their pre-existing contractual relationship. Accordingly, he considered it substantially more appropriate for English law to govern the parties' relationship for issues relating to tort, stating that:
"when the law governing all the contractual relationships between the relevant parties concerned with the Sale Contract and its financing is English law, it would seem bizarre to hold that the applicable law to determine issues arising in relation to Kookmin's tort claim against Trafigura should be the law of another country - viz, Singapore."
However, the court noted that in the earlier case of Dornoch Ltd v the Mauritius Union Assurance Co Ltd,(5) the same judge had found that there were relevant contractual relations between the parties governed by Mauritian law. Nonetheless, he had not considered this sufficient to displace the general rule and had held that English law applied, on the basis of the place in which the most significant element of the torts had occurred.
In the present case, the court sided with the approach taken in Trafigura, holding that:
"Given that the statements, terms and undertakings are the product of the same process which leads to the eventual contract it is substantially more appropriate to disapply the general rule and treat the questions of misrepresentation and misstatement as subject to the law of Denmark."
In coming to this conclusion, the court commented on the close connection between misrepresentation and contract and the fact that both causes of action give rise to the right of rescission.
The court had no qualms in denying Kingspan the right to bring a claim in misrepresentation and negligent misstatement given the absence of those doctrines from Danish law. On this point, the court noted the position under Article 12 of the Rome II Regulation (864/2007), which replaced the Private International Law (Miscellaneous Provisions) Act 1995 and which provides that:
"the law applicable to a non-contractual obligation arising out of dealings prior to the conclusion of a contract, regardless of whether the contract was actually concluded or not, shall be the law that applies to the contract or that would have been applicable to it had it been entered into."
The court regarded this as clear authority that it was acceptable for a choice of law clause to preclude a claim for misrepresentation.
Considering the substance of Kingspan's claim for misrepresentation as a matter of English law, the court commented that there had been no misrepresentation; therefore, the claim would have failed in any event.
Tort of negligent misstatement
Kingspan argued that even if the contracts were found to have been made with Borealis Denmark and the misrepresentation claim were found to be subject to Danish law, it nevertheless had a tortious claim of misstatement against Borealis UK - negligent misstatement as opposed to negligent misrepresentation, as there was no contractual relationship in this scenario. In order to make out this claim, Kingspan had to establish that Borealis UK had assumed personal responsibility for the statements made and that Kingspan had reasonably relied on that assumption of responsibility.(6) The judge was not satisfied that Borealis UK had assumed such responsibility. There was no reason to depart from the general rule in Gran Gelato v Richcliff Ltd(7) that liability for negligent statements made on behalf of a disclosed principal rests on the principal, not the agent:
"There is nothing special about the position of Borealis UK as a commercial agent… it would be anomalous if that which could not be achieved in contract could, nevertheless, be achieved in tort."
The case has reinforced the decision in Trafigura that closely connected claims in contract and misrepresentation should be governed by the same law. It is also a reminder that contracting parties must check and inform themselves of the terms on which they contract: the court is extremely reluctant to come to the aid of those who do not help themselves, particularly when they are sophisticated commercial parties.
For further information on this topic please contact Sarah Trimmings at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).
(2) And continues to apply to violations of privacy thereafter.
(5)  EWHC 1887 (Comm), later upheld in the Court of Appeal:  WECA Civ 1887.
(6) Williams v Natural Life Health Foods  1 WLR 830 applied.