Fraudulent Misrepresentation and non-party losses

What are the requirements for fraudulent misrepresentation? Can a non-party supplier claim loss of profit under a terminated contract?

The facts

Rembrandt Enterprises, Inc (Rembrandt) was a supplier of egg products. It contracted with a supplier in the Netherlands, BV Nederlandse Industrie van Eiprodukten (NIVE), to supply dried egg powder. The contract was conditional on US regulatory approvals; when these were obtained a price increase was negotiated to cover the regulatory costs.

Subsequently, NIVE informed Rembrandt that its sister company, Henningsen van den Burg (Henningsen) would be providing about 50% of the dry egg powder. 

Rembrandt alleged NIVE was failing to comply with US inspection requirements and suspended Rembrandt’s performance of the contract. NIVE then began proceedings for loss of profits on the sales that would have occurred but for suspension of performance. The claim for loss of profit was on the total amount to be supplied, including the product to be supplied by Henningsen. 

Rembrandt argued NIVE had breached a contractual warranty as the product did not comply with US regulations, and that the price renegotiation had been procured by NIVE’s fraudulent misrepresentation as the increased price included both the additional costs of complying with US regulations and an additional element of profit.

The decision

The High Court
The judge held that:

• the product supplied by NIVE did comply with US regulation, so there was no breach of warranty
• however, the increased sale price included an element of profit and therefore NIVE’s representations in emails to Rembrandt were false representations deliberately made
• it was for NIVE to prove the increased price would have been agreed without the fraudulent misrepresentation, and it could not do so
• Rembrandt was entitled to rescind the second contract, however, that then revived the original contract (without the price increase)
• even under the original contract, the judge held that NIVE could not claim for the loss on the product supplied by Henningsen.

The Court of Appeal
The appeal was dismissed. The key points from the judgment are as follows:

• it was for the representee (Rembrandt) to prove it had been materially “influenced” by the fraudulent misrepresentations; it did not need to prove that it would not have entered into the contract but for the misrepresentation
• there was a presumption that a statement which is likely to induce a representee to enter a contract did so induce it – it was for NIVE to rebut that presumption
• NIVE contended it had always intended to use Henningsen to meet its contractual commitments, but it had not communicated this to Rembrandt. Rembrandt had agreed to accept some supplies from Henningsen, but Henningsen had no contractual rights against Rembrandt
• as Rembrandt was not even aware of Henningsen at the time of contracting, the claim for transferred loss failed. 

Why is this important? 

The decision confirms the presumption of inducement is only factual, but it is “very difficult to rebut”. The other party must also only show it had been materially influenced by the representation.

The decision confirms that a party to a contract can claim for a third party’s losses resulting from a breach, as an exception to the usual rule, only if at the time the underlying contract was made there was a common intention to benefit the third party (or a class of persons to which the third party belonged).

Any practical tips?

Parties should be careful making factual statements that are to be relied upon to enter into agreements – the price negotiation was a new agreement.

If a group company (or third party) is to have a right of recovery (directly or indirectly), include specific drafting to cover such situations (eg through indemnities, amended third party rights provisions, etc).