In this Court of Appeal case, two important points of contract law were clarified: 1) the test for "inducement" in fraudulent misrepresentation; and 2) when a Claimant can recover for third-party losses.
The Claimant supplied eggs to a US company, "Rembrandt". Prior to entering into the contract, certain representations about price were made. After the contract had been entered into, the Claimant informed Rembrandt that some of the eggs would be supplied by a sister company, to which Rembrandt agreed.
Subsequently, Rembrandt suspended performance of the contract for alleged breach of warranty and the Claimant brought proceedings for loss of profits.
At first instance, Teare J held that:
- A fraudulent misrepresentation had been made. In reaching that decision, the Court ruled that there was a presumption that the fraudulent misrepresentation had been relied upon and that the burden of proof lay on the representor to show that, had the representation not been made, the contract would still have been entered into.
- Losses suffered by the sister company could not be claimed by the Claimant because the transferred loss principle did not apply on the facts.
While the Court of Appeal upheld the outcome of the first instance judgment, it did so for different reasons. It held that the burden of proof for establishing inducement lies with the representee, not the representor. Where the misrepresentation is innocent or negligent, the representee must show they would not have entered into the contract had the representation not been made. In a case of fraudulent misrepresentation, however, the representee need only show that he was "materially influenced" by the representation. A rebuttable presumption of fact (not law) will also exist that where a fraudulent misrepresentation is intended to be acted upon, a representee has been induced to act upon it.
Third party loss
The Court of Appeal confirmed that for the principle of transferred loss to arise, there must have been a common intention (or a known object of the contract) to benefit the third party (or the class to which the third party belonged) at the time of entering into the contract. Here, although Rembrandt had subsequently agreed for the sister company to provide some of the eggs, at the time of the contract it had not even known of the existence of the sister company. The appeal on this point was therefore also dismissed.
Stephenson Harwood comment
When drafting contracts where it is anticipated that third parties may become involved, pay careful attention to drafting. Had the parties not excluded the Contracts (Rights of Third Parties) Act, the Claimant might have been able to recover for the sister company's loss. Alternatively, where subsequent arrangements are made for other parties to provide services, ensure that appropriate contractual obligations are documented. The ability to claim for a third party's loss remains very much an exception to the normal rules of contract.