Court of Appeal clarifies two key contractual law issues

United Kingdom

In a case concerning a contract for the supply of egg products, the Court of Appeal has clarified two key contractual law issues: (1) the correct test for inducement in cases of rescission for fraudulent misrepresentation, and (2) the limits of the ‘transferred loss’ principle.

Background

In Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises, Inc. [2019] EWCA Civ 596, following an avian flu epidemic in the USA, Rembrandt was compelled to destroy approximately half of its own birds and to find a new source of supply for egg products to honour its contractual commitments. It entered into a supply contract with a Dutch supplier, NIVE. The following week, NIVE emailed Rembrandt seeking an additional €2.50 per kg due to unanticipated regulatory costs. Rembrandt reluctantly agreed in order to secure its supply.

NIVE later informed Rembrandt that some of the products would be supplied by its sister company Henningsen. Rembrandt agreed to make payment for these directly to Henningsen, but did not enter into a contract with it.

Rembrandt subsequently discovered that the products did not meet US regulatory requirements and that the price increase was not a genuine estimate of the cost of complying with those requirements. It refused to accept further shipments and sold on the shipments it had already received at a lower price for use in pet food. NIVE claimed damages for breach of contract. Rembrandt counterclaimed for rescission of the amendments to the contract and loss of profits caused by the onward sale at a lower price.

Decision

The test for inducement

Teare J held at first instance that Rembrandt had been induced to agree the price increase by fraudulent misrepresentations and was therefore entitled to rescind the amendments to the contract. This meant that NIVE’s claim was restricted to damages based on the sale prices in the original contract.

On appeal, NIVE argued that Rembrandt would have agreed to pay 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.

Longmore LJ disagreed, holding that the representee need only show that the fraud was “actively present in the mind” or that he was materially influenced by it. There was an evidential presumption that a representee would have been induced by a fraudulent representation intended to cause him to enter the contract, and this presumption would be “very difficult to rebut".

Transferred loss

The transferred loss principle governs situations in which a contracting party who has suffered no loss can recover damages from a defaulting counterparty in respect of loss suffered by a non-contracting third party.

At first instance, the judge held that NIVE could make no claim in respect of the loss suffered by its sister company, Henningsen, but could only claim for its own loss. The Court of Appeal upheld this decision, citing the Supreme Court authority of Swynson v Lowick Rose LLP [2018] AC 313, in which Lord Sumption stated:

“The principle of transferred loss is a limited exception to the general rule that a claimant can recover only loss which he has himself suffered. It applies where the known object of a transaction is to benefit a third party or a class of persons to which a third party belongs, and the anticipated effect of a breach of duty will be to cause loss to that third party. It has hitherto been recognised only in cases where the third party suffers loss as the intended transferee of the property affected by the breach.”

In this case, Coulson LJ concluded that the transferred loss claim must fail because on the facts, NIVE could not show that there was a common intention or known contractual object to benefit Henningsen.

Comment

The decision on inducement puts an end to uncertainty on the test for inducement in cases of fraudulent misrepresentation. It is now clear that the test does not necessarily require the Court to answer hypothetical questions about what the representee would or might have done but for the fraud or what the representee would have done had he known the truth.

The transferred loss decision also provides welcome clarity on what a claimant must show for the broader ground to succeed and is a reminder that arrangements within a corporate group may create difficulties when dealing with third parties.

For further information, please email the authors or your usual CMS contact.