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Landmark decision of the Court of Appeal on fraudulent misrepresentation and transferred loss

9th Apr 2019

Bv Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises, Inc. [2019] EWCA Civ 596

Gavin Kealey QC and Henry Moore have won a major case before the Court of Appeal on issues of fundamental importance in the law of contract. They acted for the successful Respondent together with Simon Goldstone of 4 Pump Court, who had appeared below.

The two key issues before the Court of Appeal were, first, the correct test for inducement in cases of rescission for fraudulent misrepresentation, and, second, the limits of the ‘transferred loss’ principle.

The backdrop to the dispute was an epidemic of avian flu which struck the USA in April 2015.

Hens were slaughtered in their millions.

The Respondent to the appeal, Rembrandt Enterprises, Inc., was forced to destroy over half of its birds.

Bereft of these hens, and short of egg products, Rembrandt sought to import Dutch egg products to meet customer demand, entering into a supply contract with the Appellant, NIVE.

Soon after concluding the supply contract, NIVE sought renegotiation of the price. NIVE asked Rembrandt to pay an extra €2.50/kg to cover what it represented were unforeseen additional regulatory costs. Rembrandt reluctantly agreed to the higher price in order to secure its supply of egg products.

NIVE’s representation was, in fact, fraudulent. NIVE was really intent on just making more profit.

The test for inducement

At first instance, Teare J held that Rembrandt had been induced to agree the extra €2.50/kg by fraudulent misrepresentations of NIVE.

On the issue of inducement, NIVE’s unsuccessful argument was that Rembrandt needed the egg product so badly that it would have agreed the extra €2.50 even if it had been told that it included an element of profit and did not reflect real regulatory costs. NIVE submitted that the test for inducement was whether, but for the fraud, the representee would not have entered into the contract.

On appeal, Longmore, Peter Jackson and Coulson LJJ disagreed.

Judgment on this issue was given by Longmore LJ, who held that there is no requirement for the representee to show that he would not have entered into the contract but for the fraud. Rather, the representee succeeds by showing that the fraud was “actively present to his mind” (in other words, that he was “materially influenced” by it, even if other material influences existed). This test is less exacting than that for non-fraudulent misrepresentation.

Longmore LJ also clarified that the representee may be assisted by a presumption of fact which arises where the fraudulent misrepresentation made was likely to induce the contract in question. The presumption is that the representee was induced, and it is very difficult to rebut.

This decision is very significant. It puts an end to a debate which featured in certain Commercial Court authorities about whether there is a ‘weak’ or a ‘strong’ test for inducement in cases of fraudulent misrepresentation. It is now clear that the test for inducement does not necessarily require the Court to answer hypothetical questions about what representee would or might have done but for the fraud; and it is clearly irrelevant to ask what the representee would have done had he known the truth.

The limits of the transferred loss principle

The Court of Appeal addressed a separate and discrete ground of appeal concerning the principle of ‘transferred loss’, on which the 7KBW team also succeeded.

The transferred loss principle governs certain situations in which one contracting party (who has suffered no loss) can recover damages from his defaulting contractual counterparty in respect of the loss that has actually been suffered by a non-contracting third party.

At first instance, Teare J dismissed an attempt by NIVE to recover loss suffered by a third-party sister company in NIVE’s group. The sister company was known as ‘Henningsen’. Henningsen had, with Rembrandt’s consent, delivered some egg products to Rembrandt and invoiced Rembrandt directly.

Henningsen would have delivered about 50% of the remaining egg products under the supply contract, had Rembrandt not terminated it prematurely. NIVE attempted to recover damages which did not represent its own loss but, rather, represented loss allegedly suffered by Henningsen.

Judgment on this issue was given by Coulson LJ, who dismissed NIVE’s transferred loss argument in short order.

Based on the Supreme Court authority of Swynson v Lowick Rose LLP [2018] AC 313, a claim invoking the broader principle of transferred loss (which does not depend upon an actual or contemplated transfer of property) can only succeed if there is a common intention and/or a known contractual object to benefit the third party or a class of persons to which the third party belongs.

This decision provides welcome clarity and is a reminder that arrangements within a corporate group may create difficulties for the group when dealing with third parties.

Gavin Kealey QC and Henry Moore were instructed by Squire Patton Boggs.

To view the judgment, please click here.