The chicken or the egg? Fraudulent misrepresentation and an analysis of which test comes first

3rd September 2018

The recent Commercial Court judgment of Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises, Inc. [2018] EWHC 1857 (Comm) reaffirms the earlier decision in Raiffesien Zentralbank v Royal Bank of Scotland  that in terms of misrepresentation cases, the representation needs only to be a factor, and not the sole factor, in a party’s decision to enter into an Agreement.

Background

In May 2015 Rembrandt Enterprises, Inc. (“Rembrandt”) entered into an agreement with BV Nederlandse Industrie van Eprodukten (“NIVE”) for the large-scale supply of egg-based products from the Netherlands to the US (the “Agreement”). The Agreement was conditional upon the  approval of the US regulatory authorities, which was subsequently granted shortly after the Agreement was affirmed.

Following an initial period of supply under the Agreement, in June 2015 the price of the products was renegotiated and increased (“the Re-Negotiated Agreement”).    The price increase was said by NIVE, to reflect the increase in the cost of grading inspections it would need to carry out on its products, which inspections were initially unforeseen and were required by the US authorities.

It followed that Rembrandt undertook an audit in January 2016 of NIVE’s production processes, the findings of which led Rembrandt to believe that NIVE was acting not in accordance with the relevant US regulations.  Consequently, from this time, Rembrandt rejected any further products that NIVE sought to supply under the Renegotiated Agreement. NIVE then issued proceedings in March 2016, seeking to claim approximately €19 million in lost profits as a result of Rembrandt’s refusal to accept the goods.

Rembrandt denied liability and sought to defend the claim on the following grounds:

  • when the price for NIVE’s goods was renegotiated in June 2015, NIVE fraudulently misrepresented the cost of undertaking inspection procedures required in order to comply with US regulations; and
  • the inspection procedures that NIVE had in place were such that it was in breach of warranty, under the Agreement.


Rembrandt also made a counterclaim of some €4.7 million in respect of losses incurred from selling the products on.

Fraudulent misrepresentation

It was found that Rembrandt’s case for breach of warranty was not made out, but the defence of fraudulent misrepresentation was accepted by the Court.

During the negotiation of the increased product price in June 2016, NIVE described the increased price as an “estimate” reflecting its increased costs associated with the additional processes required by US regulations, but also that this cost increase was said to follow “a thorough calculation”.  When asked for further details of this, NIVE provided to Rembrandt a “calculation” for these figures, which NIVE’s witness admitted during the trial was “partially” reverse engineered, and in this way obfuscated the “profit or buffer” elements built into the cost increase figures. 

It was found that the figures put forward did not represent NIVE’s genuine costs of complying with US regulatory requirements, and that NIVE did not consider that the figures provided genuinely represented its increased costs. The Court therefore found that NIVE misrepresented the fact that the figures were a genuine estimate of its increased costs of supply.

The Court considered whether NIVE’s fraudulent misrepresentation induced Rembrandt to agree the increase in price. The Court was invited by NIVE’s counsel to follow the decision in Raiffeisen Zentralbank Osterreich v Royal Bank of Scotland [2010] EWHC 1392, in which it was held that it was necessary to show that “but for” the misrepresentation the claimant would not have entered into the contract on the terms it did.

However, the Judge noted that in Raiffeisen Zentralbank, it was held in obiter that in cases of fraudulent misrepresentation, the “but for” test is weaker than in cases of negligent misrepresentation. In this way he found that Rembrandt need only establish that the misrepresentation was a “factor” in its decision, and that but for it, Rembrandt “might” have acted differently, not that it would definitely have done so.

The Judge concluded on the facts that the fraudulent misrepresentation was not the sole reason for agreeing the price increase, but was one of several factors, and that this was sufficient to establish inducement under the weaker test for fraudulent misrepresentation. Overall therefore, a fraudulent misrepresentation was deemed to have induced Rembrandt into a renegotiation of the Agreement.  

The judgment is claimant friendly in that a fraudulent misrepresentation is not required to be the only factor a party relied upon in contracting.

Rescission for fraudulent misrepresentation

The Judge held that the Re-negotiated Agreement could be rescinded on the basis of the fraudulent misrepresentation. It therefore reverted back to the terms of the original Agreement and position on price.  This in turn permitted NIVE to pursue a loss of profit claim arising out of a breach of the original Agreement.

Impact of the decision

The case re-confirms the test the Court will apply in the context of an allegation of a fraudulent misrepresentation. The judgment is claimant friendly in that a fraudulent misrepresentation is not required to be the only factor a party relied upon in contracting. It may be sufficient for this to be one of a number of factors.

Points to take away from this case:

  • Parties must take care in pre-contractual negotiations not to misrepresent a position, whether knowingly or being reckless as to a representation made.
  • Parties should be cautious when providing an “estimate” of facts or figures which may be relied upon, without any basis, in order to accentuate their bargaining positions. 


For more information and to discuss how this could impact you please contacts Adam Fisher or Harry Rasmussen.

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