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For Easter, a bad egg story: the English Court of Appeal warns against unscrupulous negotiating tactics
April 23 2019
Bv Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises, Inc.  EWCA Civ 596
Kevin Cooper and Freddie Courtney review a recent English Court of Appeal decision on the principle of fraudulent misrepresentation when negotiating contracts and prices, and why this provides an important warning to the shipping industry. Providing misleading information during negotiations so as to induce the counter-party to enter a contract may amount to fraudulent misrepresentation and allow the innocent party to rescind (void) the contract.
MISREPRESENTATION: THE BASICS
There are three types of misrepresentation under English law.
Fraudulent misrepresentation occurs where: (a) a false representation has been made knowingly, or without belief in its truth, or recklessly as to its truth; and (b) the representor does so to induce the representee to enter into a contract; and (c) the representee relies on the false representation and consequently suffers loss. A victim of fraudulent misrepresentation can claim both rescission, which will set the contract aside, and damages.
This differs from negligent misrepresentation, which is a statement made by one contracting party to another carelessly or without reasonable grounds for believing its truth. The test is an objective one. There is no requirement to establish fraud; once the representee proves that the statement was false, the burden is on the representor to show that it reasonably believed in the truth of the statement. As with fraudulent misrepresentation, claimants can pursue both damages and rescission of the contract.
Finally, a third type is innocent misrepresentation, where the misrepresentation was made entirely without fault, that is: where the representor can show that it had reasonable grounds to believe its statement was true. In these circumstances, a claimant is not entitled to damages, but he or she may be entitled to rescind the contract or to obtain damages instead of rescission.
In April 2015, the United Sates was hit by an outbreak of avian influenza, resulting in masses of hen fatalities. Rembrandt Enterprises Inc., a company that sells egg products in the US, suffering from a shortage of hens (and therefore eggs) was forced to seek a supplier in order to meet customer demand. Rembrandt entered into a contract with a Dutch supplier, Nederlandse Industrie Van Eiprodukten (“NIVE”).
Shortly after agreeing the supply contract, NIVE sought to renegotiate the contract and increase the price as a result of (it said) unexpected regulatory costs. NIVE provided an estimate of the increased costs for regulatory compliance, “after thorough calculation”. In order to secure the supply of egg products, Rembrandt agreed.
Following an audit of NIVE, Rembrandt learned that NIVE did not comply with US regulations and therefore rejected NIVE’s supply of egg products in January 2019. NIVE sought damages for loss of profit under the revised contract. Rembrandt denied liability, arguing that NIVE had fraudulently misrepresented the additional costs.
THE HIGH COURT’S RULING
The judge at the first instance, Mr Justice Teare, found that the estimate of the costs calculation was a deliberate false representation. Turning to the question of whether Rembrandt was induced to enter into the revised contract, NIVE argued that, given the acute need for the egg products, Rembrandt would have agreed to the increase in price anyway, even if it had been told that the increase was for NIVE to make a higher profit and not to reflect regulatory costs.
The judge disagreed, finding that the test for inducement was met by the fraudulent misrepresentation being one of the factors that “supported or encouraged” Rembrandt to agree to the revised price.
The Court of Appeal agreed with the High Court’s decision. It was satisfied that that Rembrandt was induced to enter the revised contract, the fraud being “actively present to [sic] his mind”, even if there were other influencing factors. This removed the need for Rembrandt to show it would not have entered the contract, but for the fraud.
The court also held that where the fraudulent misrepresentation was likely to induce the representee to enter into a contract, a presumption of fact arises. In this case, the presumption was that the representee, Rembrandt, was induced, and the threshold for rebutting that presumption was very high.
The courts’ decisions serve as a warning to businesses to exercise caution when negotiating contractual terms. A failure to do so can lead to a claim for fraudulent misrepresentation, resulting in rescission of the contract and damages. This is relevant in the context of shipping where, as a global industry, there can be multiple players, including shippers, owners, charterers, insurers and brokers involved in negotiations for cargo shipments, charterparties and a myriad of other commercial deals. While there is nothing to prevent tough negotiation, this case highlights the pitfalls for opportunistic parties who may be tempted to take reckless risks in what they say when negotiating terms and cross the line into acting fraudulently. The courts will have little or no sympathy for them.
Readers should also take notice of the dangers of misrepresenting facts when negotiating contractual terms, particularly in less formal meeting environments. Parties need to be scrupulous that all forms of pre-contract communications are accurate, and that they are kept accurate and up-to-date on an ongoing basis. This is especially important in an industry where parties are often from different jurisdictions and deal with one another at arm’s length, commonly through intermediaries.
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