BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises, Inc.

A representee seeking rescission for fraudulent misrepresentation bears the legal burden of proving inducement. A material fraudulent representation intended to induce contracting gives rise to a strong, but rebuttable, inference of fact that it did induce the representee. The representation need only have materially influenced the decision; it need not have been the sole or decisive cause. A court must decide inducement on all the evidence, not by asking hypothetically what the representee would have done if told the truth.

Transferred loss remains a narrow exception to the rule that a contracting party recovers only its own loss. Under the broader ground, the contract must have had a common intention or known object of benefiting the third party, or a class including it, when it was made.

BV Nederlandse Industrie Van Eiprodukten agreed to supply egg products to Rembrandt Enterprises, Inc.. Following a requested price increase, NIVE provided a calculation represented as additional regulatory cost. The High Court found that it fraudulently included profit. It allowed Rembrandt to rescind the revised contract, although the supplied products complied with the relevant United States requirements.

NIVE also claimed profits said to have been lost by its sister company, Henningsen, which supplied part of the product as NIVE’s sub-contractor. Teare J rejected that transferred-loss claim. NIVE appealed from [2018] EWHC 1857 (Comm).

The central issues were whether fraud changes the burden or standard for proving inducement, and whether NIVE could recover its non-contracting sub-contractor’s loss.

Appeal dismissed. The court upheld Teare J on both issues.

1. On fraudulent misrepresentation, the representee retains the legal burden of proving that it was induced to contract. Where a fraudulent representation was made to induce the contract, and was apt to do so, the court may draw a strong factual inference of inducement. That inference is particularly difficult to rebut, but it does not reverse the legal burden of proof.

2. Inducement requires proof that the representation materially influenced the representee’s decision or was actively present in its mind. It need not have been the sole cause. Nor need the representee prove that it would certainly have declined the contract if told the truth. A finding only that it might have acted differently is insufficient if it means that the court cannot decide inducement as a fact.

3. The judge was entitled to find that the inference had not been rebutted. The chief executive’s inability to answer the hypothetical question of what he would have done if told the truth was not decisive. The false cost calculation was one of the reasons for agreeing the increased price. Rembrandt was therefore entitled to rescind the second contract.

4. On transferred loss, the broader ground discussed in Alfred McAlpine Construction Limited v Panatown Limited [2001] 1 AC 518 requires a common intention or known object, at the time of contracting, to benefit the third party or a class to which it belongs. The exception cannot extend to every unknown sub-contractor whose loss follows a breach.

5. Rembrandt neither knew of Henningsen nor contracted, even partly, for its benefit when the contract was made. Henningsen was a separate company and NIVE’s intended use of it was unknown to Rembrandt. NIVE could not recover Henningsen’s anticipated profits as transferred loss.

• Court of Appeal (Civil Division): Dismissed NIVE’s appeal and upheld the decision of Teare J.
• High Court, Commercial Court: In [2018] EWHC 1857 (Comm), held that Rembrandt could rescind the revised contract for fraudulent misrepresentation and rejected NIVE’s claim for Henningsen’s transferred loss.