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13 November 2018
Fraudulent misrepresentation claim
Elements of fraudulent misrepresentation
How does this decision change these elements?
The test for inducement in cases of fraudulent misrepresentation is whether 'but for' the misrepresentation, the claimant 'might' have acted differently. The lower hurdle was clarified by the High Court in Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises and represents a departure from previous authorities, in which the test had been said to be whether but for the misrepresentation the claimant would have entered into the contract anyway.(1)
Eiprodukten issued proceedings in March 2016, seeking €19 million damages for breach of contract (amounting to the profit that it had expected to make on the egg products to be supplied under the revised contract). Rembrandt denied liability and counterclaimed in the sum of €4.7 million, stating that Eiprodukten had fraudulently misrepresented the costs of complying with the relevant inspection procedures required by the US regulatory authorities. (Breach of warranty counterclaims were also made and dismissed by the Court.)
The elements of a fraudulent representation are:
There is a presumption of inducement by fraudulent misrepresentations, so the person making the representation must produce evidence to rebut it.
The evidence at trial revealed that Eiprodukten knew that the cost increases which had been stated during the negotiations had been "overstated" and included an element for profit or "buffer". The first two elements for fraudulent misrepresentation were therefore satisfied.
The court then explored the 'but for' test for inducement and referred to comments made obiter in two earlier judgments.(2) The essence of the previous judgments was that where a fraudulent misrepresentation has been made, "it is sufficient to show that the representation was a factor in the claimant's decision and that but for it he might have acted differently" and not that the claimant would have entered into the contract. However, the issue of inducement for fraudulent misrepresentation was not part of the ratio of the actual decision in either of the earlier decisions.
In this case, the fraudulent misrepresentation had not been the sole reason for Rembrandt entering the revised contract, but it had been a factor. There were three key reasons underlying Rembrandt's decision to agree to the revised contract:
The court explained that to rebut the inference of inducement, it would not be sufficient for Eiprodukten to show that the representee might have entered into the contract anyway had the representation not been made. Instead, they would need to show that the representee would have entered into the contact even if the representation had not been made.
Although there was evidence that Rembrandt might have agreed to the price increase had the misrepresentation not been made, the evidence did not have the clarity and cogency necessary to persuade the court that Rembrandt would have agreed to the price increase even if the misrepresentation had not been made. As such, the presumption of inducement was not rebutted and the defence of fraudulent misrepresentation succeeded. Rembrandt could rescind the revised contract (although the original contract was held to remain in force).
This case provides helpful clarification on the test for inducement in relation to fraudulent misrepresentations and also goes further to achieve fair outcomes for claimants that have been subject to a fraudulent misrepresentation. Counterfactuals in terms of what a representee would have done but for a representation are always hypothetical and often difficult to answer with absolute certainty. This decision therefore acknowledges the commercial reality of parties' negotiations, given that they will often be motivated by more than one factor or representation.
For further information on this topic please contact Charlotte Henschen or Chris Ross at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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