Businesses must take care with "negotiating devices", expert says

The court found that Rembrandt Enterprises Inc, a US manufacturer, would not have agreed to renegotiate a contract with Dutch egg products supplier BV Nederlandse Industrie Van Eiprodukten (NIVE) had it not believed a price increase was a genuine estimate of additional costs, rather than containing an element of additional profit. That misrepresentation by NIVE was sufficient for the court to rescind the contract between the two parties and reinstate an earlier contract, in which the goods had been priced at a cheaper rate.

NIVE had brought a breach of contract claim against Rembrandt, which had rejected the products supplied by NIVE on the grounds that they had not passed US food safety inspection procedures. The court's findings mean that damages payable to NIVE must now be calculated based on the originally agreed prices, as the original contract was entered into freely and was not affected by any misrepresentation.

Rembrandt had also attempted to defended NIVE's case by claiming that the goods had been supplied in breach of warranty. However, the judge rejected this claim and ordered that the original contract stand.

The court found that a fraudulent misrepresentation had been made here when the price was renegotiated because the figures put forward by NIVE were intended to be regarded by Rembrandt as a genuine estimate of cost, but NIVE did not actually believe that the figures which it put forward were such a genuine estimate of cost because it had included an element of "profit or buffer". The judge described what had been said about the additional costs as a "negotiating device".

Generally, a party alleging misrepresentation must be able to show that the representation played a real and substantial part in inducing that party to enter into the contract in question. This test is usually referred to as the 'but for' test, as the party must show that but for the misrepresentation it would not have entered into the contract on the terms which it did.

Mr Justice Teare has now said that the correct test is a less demanding one for claimants in cases where the misrepresentation is fraudulent. In cases of fraud, it is sufficient for the party to show that the representation was a factor in its decision, and that but for that misrepresentation it might, rather than would, have acted differently.

Rembrandt gave the judge three reasons why it had accepted the increased price: its need to secure the product quickly due to a bird flu-related egg shortage in the US market; the fact that the increased price remained 'viable'; and because it had no reason to believe that the new costs put forward by NIVE were not genuine.

"In light of this evidence it seems clear that the representation was one of three matters which [Rembrandt chief executive] Mr Rettig considered and took into account before reaching his decision," he said.

"[T]he representation was made by NIVE for the purpose of persuading Rembrandt to agree to requested price increase and Rembrandt did accept the requested price increase. There is therefore a 'particularly strong' presumption, or a 'fair inference of fact', that the representation induced Mr Rettig to reach his decision in the sense that but for the representation he would not, or might not, have agreed to the requested price increase. The evidential burden therefore lies on NIVE to rebut that presumption or inference," he said.

Given the less demanding test that applied in cases involving fraud, NIVE would only be able to rebut the presumption if it could show that Rembrandt would have entered into the new contract had there been no representation. The judge found that NIVE was unable to do this.

"The case reminds businesses that being reckless in relation to what is said in contract negotiations can amount to fraudulent misrepresentation," said commercial litigation expert Michael Fletcher of Pinsent Masons, the law firm behind Out-Law.com. "Parties need to be scrupulous about any cost estimates, or any other assumptions, that they put forward in pre-contract negotiations.  They must satisfy themselves that they have a genuine basis for the figures they use and be clear as to what those figures are intended to represent. A misrepresentation can be fraudulent if it is made recklessly, and not only where the party knows that the misrepresentation is false."

Fletcher said that the risk for parties which do not take notice of this warning of being found liable for fraudulent misrepresentation, is significant: "Decisions like this show that in the case of a fraudulent misrepresentation, the law and the attitude of the courts is very much in favour of the business on the receiving end of the misrepresentation".