Businesses must exercise caution when negotiating new contracts, particularly on the issue of costs and pricing. If costs are misrepresented or over-estimated, there is a risk that the other party could rescind the contract and claim fraudulent misrepresentation, as a recent case illustrates.

What’s the background?

Following an outbreak of avian flu in the US when millions of birds had to be slaughtered, a US supplier of egg-based products needed new supplies of dried egg products and negotiated a contract with a Dutch supplier. The agreement was subject to the US regulatory authorities approval of the procedures in the Netherlands for the regulatory supervision of the egg business. Once approval was given, the price was renegotiated upwards because of the additional costs associated with complying with the US regulations.

However, the figures presented by the Dutch supplier were intended to be accepted by the US as a genuine estimate of costs, whereas the evidence showed the figures actually included “an element of profit or buffer”. Following an audit of the Dutch company’s production processes, the US Company decided that they did not comply with US regulations and rejected the Dutch Company’s products. The US company refused to accept further shipments and claimed (among other things) fraudulent misrepresentation.

The High Court ruled that the costs put forward by the supplier amounted to a negotiating tactic and was not a genuine estimate of its costs. On the evidence, the supplier knew it was not a genuine estimate but something said to bring about a renegotiation of the price. This amounted to fraudulent misrepresentation on the part of the Dutch company as to additional compliance costs – with the intention of persuading the US company to agree a price increase.

What does this mean?

When preparing and conducting contract negotiations, business must take care to ensure they provide genuine estimates of their costs where they are presented as such or are intimated to be so – or risk claims of misrepresentation. It is good practice to make sure you have evidence to support any cost estimates in case a dispute later arises.

If a business is found to have deployed negotiating tactics in the form of, for instance, misrepresenting their estimated costs, it risks losing the contract and facing a potentially significant damages claim. The ruling is an important lesson to take due care in contract negotiations and avoid any ‘dirty tricks’ to induce the other party into concluding a contract.