Timeline
Fraudulent misrepresentation claim
Elements of fraudulent misrepresentation
How does this decision change these elements?
Comment



The test for inducement in cases of fraudulent misrepresentation is whether 'but for' the misrepresentation, the claimant 'might' have acted differently. The lower hurdle was clarified by the High Court in Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises and represents a departure from previous authorities, in which the test had been said to be whether but for the misrepresentation the claimant would have entered into the contract anyway.(1)

Timeline

  • In April 2015 an avian flu epidemic in the United States left businesses that used egg-based products looking to import from unaffected countries.
  • In May 2015 the US-based company Rembrandt Enterprises signed a contract with the Dutch company, BV Nederlandse Industrie van Eiprodukten for the latter to supply such products.
  • In June 2015 the US regulatory authorities approved the procedures for manufacture in the Netherlands.
  • In June 2015 the price of the products was renegotiated and increased and a revised contract was signed. During negotiations, Eiprodukten represented that the proposed price increase reflected the increases to its costs as a result of required regulatory inspections.
  • In January 2016 Rembrandt audited Eiprodukten's facilities to validate the practices said to justify the increased prices in the revised contract. Rembrandt concluded that Eiprodukten was not compliant with US regulations and rejected further deliveries.

Fraudulent misrepresentation claim

Eiprodukten issued proceedings in March 2016, seeking €19 million damages for breach of contract (amounting to the profit that it had expected to make on the egg products to be supplied under the revised contract). Rembrandt denied liability and counterclaimed in the sum of €4.7 million, stating that Eiprodukten had fraudulently misrepresented the costs of complying with the relevant inspection procedures required by the US regulatory authorities. (Breach of warranty counterclaims were also made and dismissed by the Court.)

Elements of fraudulent misrepresentation

The elements of a fraudulent representation are:

  • an untrue statement of fact (not opinion);
  • that the person making the statement must know that it is untrue; and
  • that the representee must be induced by the representation (ie, the statement must play a real and substantial part in inducing the claimant to enter into a contract (but does not have to be the sole reason)).

There is a presumption of inducement by fraudulent misrepresentations, so the person making the representation must produce evidence to rebut it.

How does this decision change these elements?

The evidence at trial revealed that Eiprodukten knew that the cost increases which had been stated during the negotiations had been "overstated" and included an element for profit or "buffer". The first two elements for fraudulent misrepresentation were therefore satisfied.

The court then explored the 'but for' test for inducement and referred to comments made obiter in two earlier judgments.(2) The essence of the previous judgments was that where a fraudulent misrepresentation has been made, "it is sufficient to show that the representation was a factor in the claimant's decision and that but for it he might have acted differently" and not that the claimant would have entered into the contract. However, the issue of inducement for fraudulent misrepresentation was not part of the ratio of the actual decision in either of the earlier decisions.

In this case, the fraudulent misrepresentation had not been the sole reason for Rembrandt entering the revised contract, but it had been a factor. There were three key reasons underlying Rembrandt's decision to agree to the revised contract:

  • Rembrandt was keen to secure the product quickly. Given the shortage of eggs in the US market, it had customers who were "in deep, deep, deep need of product".
  • Even with the increased prices, the contract terms remained viable for Rembrandt. The prices proposed under the revised contract were still lower than the equivalent prices using the relevant US market index.
  • Rembrandt had no reason to believe that the costs submitted by the claimant were inaccurate.

The court explained that to rebut the inference of inducement, it would not be sufficient for Eiprodukten to show that the representee might have entered into the contract anyway had the representation not been made. Instead, they would need to show that the representee would have entered into the contact even if the representation had not been made.

Although there was evidence that Rembrandt might have agreed to the price increase had the misrepresentation not been made, the evidence did not have the clarity and cogency necessary to persuade the court that Rembrandt would have agreed to the price increase even if the misrepresentation had not been made. As such, the presumption of inducement was not rebutted and the defence of fraudulent misrepresentation succeeded. Rembrandt could rescind the revised contract (although the original contract was held to remain in force).

Comment

This case provides helpful clarification on the test for inducement in relation to fraudulent misrepresentations and also goes further to achieve fair outcomes for claimants that have been subject to a fraudulent misrepresentation. Counterfactuals in terms of what a representee would have done but for a representation are always hypothetical and often difficult to answer with absolute certainty. This decision therefore acknowledges the commercial reality of parties' negotiations, given that they will often be motivated by more than one factor or representation.

For further information on this topic please contact Charlotte Henschen or Chris Ross at RPC by telephone (+44 20 3060 6000) or email (c[email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) [2018] EWHC 1857 (Comm).

(2) Raiffeisne Zentralbank Osterreich v Royal Bank of Scotland [2010] EWHC 1392 and Cassa di Risparmio della Republica di San Marino SpA v Barclays Bank Limited [2011] EWHC 484 (Comm).