Egg supplier ends up with egg on its face

An aptly-timed Court of Appeal decision has brought eggs into the spotlight just in time for Easter. Fraudulent misrepresentation and claims for third party loss were two issues that the Court considered last week in a dispute between egg suppliers based in the Netherlands and the US (NIVE and Rembrandt, respectively).[1]

Laying the egg: the underlying facts

Back in May 2015, Rembrandt entered into a contract with NIVE under which NIVE was to supply egg products to Rembrandt. Shortly after that contract, NIVE indicated that there would be an unanticipated extra regulatory cost which would require a price increase. Rembrandt agreed to the increase and the parties entered into a new contract in June 2015.

When shipments begun a few months later, NIVE informed Rembrandt that some of the egg products would be supplied by Henningsen van den Burg (its sister company).

Not long afterwards, Rembrandt suspended its performance of the contract alleging that NIVE failed to comply with US inspection requirements.

Incubation: the arguments before the High Court

NIVE sued Rembrandt for loss of profit on the sales that would have taken place but for that suspension of performance. Rembrandt claimed that it was entitled to rescind the second contract because (i) the increased sale price in the second contract was not all that it was cracked up to be and in fact, the increased price included an element of profit, not only regulatory costs (which amounted to fraudulent misrepresentation); and (ii) the products did not comply with US regulations (which amounted to a breach of warranty).

Hatched in the High Court

The High Court found that NIVE had made fraudulent misrepresentations to Rembrandt and could not prove that Rembrandt would have entered into the second contract regardless. Rembrandt was therefore able to rescind the second contract. However, that resurrected the first contract (which would otherwise have been terminated by the second). As the High Court egged to differ on any breach of warranty, Rembrandt was still liable to NIVE for damages for breach of the first contract. However, the High Court held that Rembrandt was liable only for NIVE's losses and not for its affiliate's losses.

NIVE appealed on the grounds that (a) it was for Rembrandt to prove that it would not have entered into the contract but for the fraudulent misrepresentation; and (b) it could recover its affiliate's losses as well as its own.

Cracked in the Court of Appeal (to mix a metaphor)

Who has the onus of proof on reliance when it comes to fraudulent misrepresentation?

The representor.

The Court held that there is a factual presumption that the representee entered into the contract in reliance upon the fraudulent misrepresentation (even if it is one of several reasons for doing so), which can be rebutted by the representor.

NIVE could not prove that even if it had not made the false representations regarding the price increase, Rembrandt would still have entered into the second contract. Rembrandt was therefore entitled to rescind the second contract, and as a consequence, NIVE could only claim for loss of profit based on the sales prices in the first contract.

Can a contracting party recover both its own losses and those of a non-contracting party?

Only if the contract is for the known benefit of that non-contracting party. Otherwise, a transferred loss claim must fail.

Rembrandt, in this instance, was not even aware of the existence of Henningsen at the time that the contract was made, let alone the possibility that Henningsen might supply the egg products. As such, NIVE was unable to show that there was a common intention to benefit the third party, which was crucial to establishing a transferred loss claim. Consequently, NIVE could claim only for its own loss, and not the loss suffered by Henningsen.

Counting your chickens before they are hatched

While it is rare for a fraudulent misrepresentation to be established, this decision reaffirms the difficulties faced by the representor once a fraudulent misrepresentation has been found. More broadly, however, the case is a reminder that post-contractual events will rarely alter the contractual position. If third parties become involved, or the parties' performance starts to change from that set out in the contract, it is always preferable for those changes to be reflected in a variation to the contract. Otherwise, if things go wrong, the less advantageous contractual position may well prevail.

Happy Easter!

[1] BV Nederlands Industrie Van Eiprodukten v Rembrandt Enterprises Inc [2019] EWCA Civ 596