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Retail Matters – Autumn 2018

Retail Matters – Autumn 2018

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Addressing ‘review fraud’ in the online retail marketplace

Walker Morris’ Head of Commercial Dispute Resolution and retail specialist Gwendoline Davies explains ‘review fraud’ […]

Walker Morris’ Head of Commercial Dispute Resolution and retail specialist Gwendoline Davies explains ‘review fraud’ and offers potential solutions for retailers.

What is the issue?

Fake reviews have featured in the press a lot recently, but they are certainly not a new phenomenon and such practices have no doubt existed for as long as people have been reviewing products and services. However, the explosion of the online retail marketplace has made fake reviews a very lucrative business. At present it can be difficult for businesses to identify, prevent and respond effectively to fake reviews. However, a recent landmark case saw an Italian court sentence a man to prison for ‘paid review fraud’ (the act of selling fake reviews to businesses). This is the first case of its kind. Walker Morris’ Head of Commercial Dispute Resolution and retail specialist Gwendoline Davies explains and offers practical advice.

Effect on the marketplace

On selling platforms (such as Amazon, for example) and review platforms (such as TripAdvisor), the number of positive reviews a seller has directly effects its prominence in searches, and a seller with a higher rating is likely to sell more. In addition, consumers have become increasingly reliant on user-reviews and the weight given to such reviews when deciding whether to make a purchase is often greater than that of traditional advertising. In 2015 the Competition and Markets Authority published figures that 54% of UK adults use online reviews and £23 billion per year of UK spending is potentially influenced by online reviews [1] and the figures will, no doubt, have increased since then. This trend in buyer behaviour has opened the door for those looking to exploit the online marketplace by selling favourable reviews. This process is known as ‘review brushing’ and appears to be thriving. ‘Brushers’ are people hired to provide positive feedback in order to boost the vendor up the rankings in online searches, leading to increased sales.

A case involving review brushing was recently considered by the Italian courts. TripAdvisor brought a claim against PromoSalento, a digital marketing agency which was known to specialise in selling ‘review packages’ in the hospitality industry. PromoSalento charged 100 Euros for 10 reviews and offered discounts for buying in bulk. The landmark ruling of the Italian courts saw the man behind PromoSalento jailed for 9 months and ordered to pay 8000 Euros in costs and damages. In reaching its decision, the court identified a provision in the Italian Constitution which established that writing fake reviews under fake profiles is a criminal offence.

On the other side of the coin, fake negative reviews can be devastating – especially for small businesses. (For example, in America, a newlywed couple undertook a campaign of fake negative reviews in respect of their wedding photographer, who was forced to close down his business as a result).

Apart from review brushing and the posting of fake reviews, the marketplace is also increasingly experiencing indirect unscrupulous practices, including sellers offering free goods in return for positive reviews; sellers insisting that a refund to a consumer is conditional on the consumer providing a high or five-star rating; or sellers refusing to provide refunds where consumers have posted honest but unfavourable reviews.

How can responsible retailers protect themselves?

One tip for spotting fake reviews is to read the reviews carefully. Typically companies who provide fake review services use several writers for the task, so the first few reviews may appear genuine. However, as more reviews come in, patterns may emerge. A careful analysis of reviews may reveal similarities in style and language which indicate that the reviews came from the same source, and are therefore not genuine [2]. As well as this type of ‘manual’ analysis, specialist software/tools can screen reviews against various data points (including language, date, image, etc) to automatically identify and remove fakes; plus wherever reviewers have profile pictures of any kind, reverse image searching across the internet can detect those ‘people’ or accounts who post repeated reviews.

The consumer group Which? has recently published the following advice on how to spot a fake review [3]:

Do not rely on ratings alone. Delve deeper and read the reviews.
Check the dates. If many reviews were posted in a short time period, it might mean there was a deliberate push for them, which may or may not have been legitimate.
Critically assess impartiality. Click to research reviewers and their history. Do they give everything five stars?
Look at the pattern of ratings. If the ratings are at different ends of the scale with very little in between, that could be suspect, as it is rare that people are completely polarised about a product. Similarly, if some reviews highly praise an aspect of a product that others have criticised, that could be a red flag.

How can UK retailers take action?

Broadly there are two practical ways in which retailers can deal with fake reviews: some businesses respond to reviews directly (which might involve reasonably answering/addressing untrue or unreasonable reviews and/or asking for the review to be removed); whilst others hire marketing firms to help them do so. Marketing firms might also respond to reviews and/or they might apply wider strategies for improving a business’ image and ratings. Any responsible retailer using a marketing firm should ensure that those strategies do not involve review brushing, as that could result in liability, not to mention potential reputational damage, for the retailer itself.

Another important practical tip, especially for smaller retailers, is to ensure that your customer service is excellent at all times. Dealing positively and effectively with issues or complaints can help to minimise the potential for disgruntled customers airing their grievances online.

There are, however, also a number of legal options. The following non-exhaustive list sets out potential grounds under which a retailer and/or a consumer may take legal action in respect of fake reviews depending upon the specific circumstances:

The Consumer Protection from Unfair Trading Regulations 2008 (CPRs) – A number of unfair commercial practices are excluded under the CPRs, including misleading consumers into buying a product [4].
Business Protection from Misleading Marketing Regulations 2008 (BPRs) – This legislation includes, among other things, a general prohibition on misleading advertising. False reviews which are made in order to promote the sale of a product could be considered advertising and could therefore fall within the ambit of the BPRs.
Defamation – Although a retailer may have no legal recourse against a genuine review which makes it look bad, the tort of defamation can be used to take action against unfounded reviews which damage a business or its reputation.
Misrepresentation – A misrepresentation is an untrue statement which induces a party to enter into a contract. If when purchasing goods or services a party has relied on a fake review which has been solicited by the retailer, then this may be actionable.
Fraud – Where a claimant is able to actually prove the dishonest intentions of the person posting (or, potentially, inciting) the fake review, then it may be able to pursue a charge of fraud by false representation under section 2 of the Fraud Act 2006, which could be pursued by a referral to the police (Action Fraud) or the SFO (if sufficiently serious) or a private prosecution.
Providing fake reviews can also constitute a criminal offence under various other statutory provisions [5] and can be punishable by a fine and/or varying lengths of imprisonment depending upon how the offence is classified.

WM Comment

As the incidence and ingenuity of online review manipulation increases, and in an already highly competitive retail market, it is essential that retailers do all they can to protect their brand and the credibility of their products and their online presence. Responding quickly and effectively to fake reviews, in whatever form they may appear, can form an important part of that.

If you are a retailer with any concerns in relation to the issues covered in this article, or if you would like any further advice or information about potential legal solutions, please do not hesitate to contact Gwendoline Davies, who will be happy to help.

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[1] CMA Report on Online Reviews and Endorsements, June 2015
[2] Source: Ownership Online article, September 2017
[3] Which? The facts about fake reviews; and Which? How to spot a fake review
[4] See our earlier briefing for more information on the CPRs.
[5] under various potentially relevant legislation (such as Consumer Protection Act 1987, Trade Descriptions Act 1968, Food Safety Act 1990, Financial Services Act 1986, Trade Marks Act 1994, for example)

Use of plastic in the food and drink[...]

With the coming to prominence of environmental concerns around plastic – particularly single-use and difficult-to-recycle […]

With the coming to prominence of environmental concerns around plastic – particularly single-use and difficult-to-recycle plastic – the food and drink sector is already being challenged to review its use of plastic.

Further challenge is brought by a wave of regulation. Shortly after the European Commission proposed the introduction of a Single Use Plastic Directive, the autumn budget has supplemented the packaging producer responsibility regime with the introduction of a tax intended to reduce the environmental consequences of plastic.

What does this mean for manufacturers and operators in the food and drink sector?

Plastics Tax and Producer Responsibility

Expected to commence in April 2022 the tax will apply to importers and producers of plastic packaging. Although the precise nature of the tax has not been detailed, only plastic packaging that has at least 30% recycled plastic content will be exempt from the tax.

Alongside the plastic tax, the government have announced changes to the current Packaging Producer Responsibility System.

The intention is to heighten responsibility for businesses in relation to the treatment of plastic packaging after use, increasing involvement in the recycling and clean-up of their products, promoting easily recyclable packaging and deterring the use of hard to recycle plastics.

The government is increasing funding by £10 million for research and development into plastics and a further £10 million for innovation into recycling and minimising waste.

The divergence between the UK and EU approach to reducing waste was highlighted by the Chancellor’s direct rejection of the so called ‘latte levy’, the introduction of a charge to disincentivise the use of, often single use, plastic cups. It was suggested this measure would be inappropriate in isolation and unlikely to generate change. In contrast, the EU’s proposed directive targets specific disposable items that make a disproportionately large contribution to marine and beach waste.

Although support has been shown for the Chancellor’s proposals, concern has been expressed over the available supply of recycled plastic, fundamental to achieving the 30% requirement. It is hoped the increased spending on innovation, research and development and the revenue from the tax will enable a sufficient supply of recycled plastic for suppliers to reach the 30% requirement.

Single Use Plastic Directive

The directive aims to reduce the volume of waste plastic claimed by the European Commission to account for over 80% of marine waste. It focuses on prevalent discarded items including: plastic bottles, straws, food packaging and cotton buds, and has been extended by the European Parliament to include items made of expanded polystyrene and oxo-degradable plastic. The directive updates the existing EU concept of Extended Producer Responsibility by introducing additional obligations on importers and producers to mitigate the consequences of their products upon the environment.

Implications for the food and drink sector

The directive outlines specific mechanisms, dependent upon the item, that aim to reduce aggregate plastic waste. For products with renewable alternatives, bans will be introduced, and where bans are inappropriate industries may be required to finance waste management; increase awareness of the implications of plastic; and/or alter labelling to reflect a product’s plastic content, how to dispose of it and its environmental consequences.

Additionally, EU Member States will be required to introduce reduction and collection targets, one example being the introduction of a 25% reduction in the use of food containers for fruits and vegetables by 2025.

There remains uncertainty surrounding the potentially far reaching implications of the directive. The proposed definition of a single-use plastic product includes items only ‘partly’ containing plastic. The wide-scope of the directive may prove onerous for manufacturers. The European Council have reacted positively towards the directive but seek further clarification on the definition of single use and have requested guidance detailing examples of relevant products.

Brexit makes the implications of the directive for the UK uncertain. However, it is clear that the UK is taking steps to address single use plastic and plastic packaging.

The food and drink sector should take the opportunity to participate in consultation with government and regulators on regulatory policy. If they are not already doing so, operators should be prepared to review their processes and supply chains and innovate to address the use of difficult-to-recycle plastics in packaging.

Why international illegal logging might represent a risk[...]

A UK-based retailer might be forgiven for thinking that illegal logging in, say, Africa or […]

A UK-based retailer might be forgiven for thinking that illegal logging in, say, Africa or India, is a world away from its business concerns. However, two recent prosecutions by the Office for Product and Safety Standards (OPSS) highlight that the Timber and Timber Products (Placing on the Market) Regulation 2013 (the EU Timber Regulation) could represent a real risk. Walker Morris’ Retail and Regulatory experts Gwendoline Davies, Jane Weaver and Claire Burrows explain and offer their practical advice.

What does the law say?

The EU Timber Regulation has been enacted to counter trade in illegally harvested timber and timber products by imposing a number of criminal offences:

Placing illegally harvested timber on the market for the first time;
Failing to exercise due diligence to check the legality of the timber when placing timber or timber products on the market for the first time;
Failing to maintain and evaluate a due diligence system;
For those who buy or sell timber products already on the market, failing to keep the required information about suppliers and customers to make timber more easily traceable;
Obstructing an inspector; and
Failing to comply with a remedial notice.

The offences are variously punishable by a fine and/or imprisonment. The OPSS also has powers of entry, inspection and the power to seize illegally harvested timber.

What is the risk for retailers?

Any retailer whose business involves the buying or selling of timber for commercial purposes, or otherwise placing internationally-sourced wood or wood products on to the market, obviously needs to comply with the Regulations… but what does that really mean? What types of wood products are caught, and to what extent do retailers whose primary products are not timber-based need to be concerned?

In fact, the EU Timber Regulation has an incredibly wide reach. A list of products covered can be found here, but could (non-exhaustively) include:

Certain types of non-printed paper, including craft paper, stationery, till rolls;
Plywood, veneered wood, fibreboard, laminated wood and other wood-based building materials or prefabricated buildings which might be imported directly and then used in the course of a retailer’s business (for example on any fit-out or as additional office space);
Casks, barrels, vats, tubs, pallets and packing cases/boxes (unless they are used exclusively as packing material to support another product);
Wooden furniture or artefacts, even including frames for paintings, photos, mirrors or the like; and
Sawdust, logs, briquettes and similar.

The OPSS was created in January 2018. Its update published in July 2018 revealed that two businesses have recently been prosecuted under the EU Timber Regulation: one retailer being fined for importing an Indian sideboard made from illegally harvested timber; and one timber merchant being fined for due diligence failings. The UK government has also recently indicated that it intends to retain the current regime (with only minor technical changes) post-Brexit. This is therefore clearly a live issue of which all retailers should be aware.

What can retailers do?

Retailers should conduct a risk assessment to establish whether they are an ‘operator’ or a ‘trader’ (or both) under the EU Timber Regulation. (Operators are those who first place timber products on the EU market; traders are those who buy or sell timber or timber products already on the market.)
Retailers should be aware of which obligations/offences apply, as there are different levels of responsibilities. For example, operators must adequately check the legality of the timber before placing it on the EU market, whereas traders must keep track of who they buy from and sell to.
Retailers should note which products do and do not fall under the Regulations. For example, the Regulations do not apply to recycled products, some bamboo and rattan products, or to timber that is being bought or sold by private individuals for their own personal use.
Evidence of illegal logging across the world may be available from various sources, such as research institutions and government sources. Retailers may wish to keep up-to-date with this information. This could involve setting-up alerts with key sources so as to be kept apprised of new illegal logging warnings.
Following a detailed risk assessment, retailers should introduce or amend such appropriate policies, procedures, staff training, due diligence and record-keeping measures as are proportionate to the risks identified. Doing this could form the basis of any due diligence defence that a retailer may wish to raise if/when the OPSS does come knocking.
Retailers may also wish to contractually oblige suppliers to submit to audits to verify legality, transparency and traceability of all timber and timber products across the supply chain.

If you would like any further advice or assistance in connection with this or any other Retail or Regulatory-related matter, please do not hesitate to contact Gwendoline, Jane or Claire, who will be happy to help.

Strict approach to service of notice

Ropemaker Properties v Bella Italia [1] is the latest in a flurry of cases [2] […]

Ropemaker Properties v Bella Italia [1] is the latest in a flurry of cases [2] which have highlighted traps for the unwary when it comes to serving legal notices. In an uncertain economic climate parties often want to escape contracts or leases that are no longer viable, or they want to avail themselves of opportunities to bring claims under warranties or indemnities where contracts and timescales allow. In recent months we have seen an increase in cases where parties have tried to do all of these things, but have fallen foul of service requirements. Specialist Real Estate Litigator Ruth Ormrod shares her top tips to mitigate risk.

Invalid notice to terminate agreement for lease

In this case the tenant had, in 2014, entered into an agreement for lease in relation to a retail unit in a proposed new development in Colchester. In May 2017, however, the tenant sought to terminate the agreement by sending written notice to the landlord. Unfortunately for the tenant, the relevant clause in the agreement for lease also required service on the guarantor for any such notice to be valid. The High Court held that it was irrelevant: that the tenant and guarantor were group companies; that the relevant requirements had been complied with in substance (if not in form) by virtue of the fact that intention to terminate the agreement for lease had been noted in the board minutes of the tenant’s and guarantor’s parent company; and that the additional service requirement had no apparent purpose or commercial benefit. In doing so the court insisted upon the well-established strict approach to service of notices, emphasising that service formalities must be complied with absolutely precisely, even if that ultimately means that a notice is found to be invalid on a very technical, even unattractive, basis. The tenant therefore remained bound to complete the lease, despite that no longer being its preferred commercial course.

Top tips for effective notices

A good tip, when it comes to the service of any legal notice, is to remember the mantra: who, when and how?

Immediately a party considers serving (or, conversely, challenging) a notice, it should ascertain exactly:

Who

Who is required to give notice and on whom the notice should be served. (Consider the party/counter-party itself? Legal representatives? Other agents? Have there been any assignments, novations or variations which change the position? What are the current names and addresses/contract arrangements for the relevant parties/agents?)

When

When the notice should be served, including whether there are any long-stop dates for service or for completion of any other conditional/procedural steps (such as commencing any follow-on court claims, or the like).

It is also important to bear in mind, when calculating dates, that there may be different dates to ascertain. For example, depending on the nature and wording of the notice clause, you may need to know the date on which a notice actually has to take effect; the date by which it has to be served on (i.e. received by) the receiving party; and/or the date by which it has to be issued.

All of those dates can be influenced by other factors (such as the required method of valid service; how long that will take; whether the contract designates when service will take place or whether the contract relies on external deeming provisions; whether there are any weekends/bank holidays to take into account and/or whether only working/business days count (which can differ across different countries); and so on.

How

The ‘how‘ covers: the specific content of the notice; the form of the notice and any strict procedural requirements (in Mannai [3], the leading case, Lord Hoffmann famously said: “if the [termination] clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper“); and the fact that service must be effected in accordance with any contractually specified method. (The latter can, in turn, can lead to problems if notification obligations within contracts are drafted in isolation from, or inconsistently with, more general service clauses and other relevant contractual provisions. For example, what happens if a party gives a PO box as its service address, but the contract specifies service by recorded delivery? (You cannot effect recorded delivery on a PO box) What happens if the contract specifies that the service address is a party’s registered office, but the agreement is assigned to an individual? (Individuals do not have registered offices).)

WM Comment

The best advice is to leave the service (or, again conversely, the acceptance) of any legal notice entirely to the experts. The consequences of getting it wrong can be too costly to gamble. Instructing specialist legal representatives to take on the risk for you reduces the chance of any problems arising.

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[1] [2018] EWHC 1002 (Ch)
[2] See our related articles for cases involving lease break notices and warranty claim notices, for example.
[3] Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, HL

Retail headlines – Autumn 2018

As of 6 November 2018, CAP has published new rules on the use of data […]

As of 6 November 2018, CAP has published new rules on the use of data for marketing, along with 5 top tips to ensure compliance.

The Department for Business Energy and Industrial Strategy and the Competition and Markets Authority have announced an investigation into ‘personalised pricing’ – that is, the practice of retailers charging different online shoppers different prices for the same items, depending on shoppers’ specific customer journeys and personal data (including address, marital status, birthday and travel history). The aim of the research is to protect consumers from unfair practices, as well as to address issues raised in the recent Citizen’s Advice recent super-complaint on ‘loyalty penalties’. Walker Morris will monitor and report on developments.

On 22 November 2018 the Financial Conduct Authority announced proposals to introduce a price-cap on the rent-to-own (RTO) sector which will limit the price and any credit costs that RTO retailers can charge customers for household goods such as TVs, washing machines, cookers, furniture and the like. the consultation can be accessed here and is open until 17 January 2019. If agreed, the proposals will come into force on 1 April 2019.

Germany’s competition agency, the Bundeskartellamt (BKartA), commenced an investigation into Amazon over suspected abuse of dominance on 29 November 2018. Following seller complaints, BKartA is looking into whether Amazon hinders sellers who depend on the portal through its double role as retailer and marketplace. Particular terms under scrutiny involve liability provisions to the disadvantage of sellers, in combination with choice of law and jurisdiction clauses, rules on product reviews, non-transparent termination and blocking of accounts, and withholding or delaying payment. At the same time, whilst no official investigation has been opened, the European Commission is making enquiries into Amazon’s use of data to the disadvantage of marketplace sellers; and the French economy ministry has filed a complaint before the Paris Commercial Court and seeking a EUR 10 million fine against Amazon, for the imposition of what it says are unfair contractual restrictions and Amazon’s abuse of its dominant position. Walker Morris will monitor and report on developments.

A Christmas party punch-up; a data protection breach – Vicarious liability in a variety of cases

In two recent cases with very different facts, the Court of Appeal has made findings […]

In two recent cases with very different facts, the Court of Appeal has made findings of vicarious liability against employers for employee misconduct outside the workplace/outside working hours. Employment and Retail specialist Shakeel Dad explains and offers practical advice.

What is vicarious liability?

“Vicarious liability” is a legal concept under which employers can be found liable for the wrongful acts of their employees where there is a sufficient connection with the employee’s employment, such that it would be fair to hold the employer vicariously liable. This involves the court asking:

What duties/activities were entrusted to the employee?
Was there sufficient connection between the employee’s position and the wrongful conduct so as to make it just and reasonable [1] for there to be vicarious liability?

Bellman v Northampton Recruitment [2018] EWCA Civ 2214

In December 2011, Northampton Recruitment Ltd held its Christmas party at a golf club. The party was attended by many staff including a sales manager called Mr Bellman and the company’s managing director, Mr Major. The party ended at around midnight, but some staff took taxis to a hotel bar (paid for by the company) and continued drinking. At around 3 am Mr Major and Mr Bellman became involved in an argument about work and how things should be done. Mr Major punched Mr Bellman twice which led to Mr Bellman falling and hitting his head on the ground. Mr Bellman’s skull was fractured, leading to severe brain damage. Mr Bellman sued the company on the basis of vicarious liability.

The Court of Appeal found for Mr Bellman, deciding that there was a sufficient connection between the employment and the assault because:

Mr Major was the MD of the company and was very autonomous and dominant in this role.
The Christmas party had been paid for and organised by Mr Major.
Mr Major had offered to pay for taxis to take staff to the nearby hotel bar after the formal party ended.
At the hotel bar, the company paid for the majority of the drinks consumed.
The attack occurred immediately after an altercation about work because Mr Major had become angry that his decisions were being questioned.
Mr Major had made comments to the staff whilst at the bar that the company was ‘his business’, he paid their wages and he got to make the decisions.

The Court of Appeal held that even if Mr Major had “taken off his managerial hat” when he first arrived at the hotel bar, he “chose to don it once more and to re-engage his wide remit as managing director and to misuse his position when his managerial decisions were challenged”.

WM Morrison Supermarkets Plc v Various Claimants [2018] EWCA Civ 2339

In the Morrisons case, the supermarket has lost its appeal against a High Court ruling that it is vicariously liable for the actions of one of its former employees who deliberately leaked payroll data relating to almost 100,000 employees.

Morrisons submitted on appeal that the sufficient connection test was not satisfied, since the wrongdoing that caused the harm was done by the individual at his home, using his own computer, on a Sunday, several weeks after he had downloaded the data at work on to his personal USB stick. However the Court of Appeal agreed with the High Court that there was an “unbroken thread” linking the individual’s work to the disclosure of the data.

Morrisons also argued that to impose vicarious liability on Morrisons in circumstances where the individual’s motive was to harm Morrisons would render the court an accessory in furthering his criminal aims, but this was dismissed by the Court of Appeal on the basis that motive is irrelevant to vicarious liability and there is no such exception where the motive is to cause financial or reputational damage to the employer.

The Court of Appeal also gave short shrift to the submission that, given the number of employees affected, a finding of vicarious liability would place an enormous burden on Morrisons (and on other innocent employers in future cases).

Further proceedings are due to take place to determine the level of compensation. Morrisons has said that it will appeal to the Supreme Court.

Conclusions and practical lessons

These two very different cases highlight to employers both the increasingly wide reach of the vicarious liability ‘sufficient connection’ test and the hugely varying, potentially even unlimited, factual scenarios in which such a claim could arise. But are there any practical lessons for employers to take away?

The Bellman case was an unusual case of a Managing Director trying to assert his authority by using physical aggression outside of work. It does not set a precedent that vicarious liability will always arise from an assault after two colleagues get into a drunken argument about work because it will always depend on the specific facts of the case. To emphasise this point, the Court of Appeal stated that its decision was “not authority for the proposition that employers become insurers for violent acts by their employees”. Nonetheless, the decision does make it clear that employers can be vicariously liable for wrongful acts outside of the normal employment environment and this could, in certain circumstances, include a senior employee trying to pull rank through the use of aggression or violence.

In the run up to the festive season, it is worth reminding staff that any harassment, verbal or physical aggression either at the party or at any ‘after-party’ could lead to disciplinary consequences including dismissal. It is well documented that excessive alcohol consumption is linked to violence so limiting the amount of free alcohol available or paid for by the company at the event is always advisable, unpopular as this may be!

It would be prudent, in light of the Morrisons decision, for employers to review their existing policies and procedures and to consider imposing strict[er] internal controls to guard against the risk of employees ‘going rogue’ – especially in those parts of the business where employees are regularly entrusted with personal data and confidential or sensitive information.

Finally, employers should check the terms of their insurance to ensure that the business is adequately protected, should any vicarious liability claim arise.

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[1] In Mohamud v WM Morrison Supermarkets plc [2016] UKSC 11 the Supreme Court said that the question of whether it is ‘just and reasonable for there to be vicarious liability’ should be considered in line with the principle that businesses should bear the loss caused by business related risks materialising, including the risk of an employee misusing his or her position.

Fraudulent misrepresentation – a supply chain case

Commercial Dispute Resolution Director Tim Pickworth looks at a recent supply chain case and explains […]

Commercial Dispute Resolution Director Tim Pickworth looks at a recent supply chain case and explains how the law of misrepresentation can affect any modern retail business.

Why misrepresentation might be an issue for your retail business

When parties consider doing business together, a multitude of enquiries, discussions and negotiations take place before any deal is done. Marketing campaigns, promotional offers and other communications have often been undertaken, and information has been displayed online, prior to the contemplation of any particular enquiries or leads. As part of the entire pre-contract process, myriad representations are made, many of which could give rise to liability.

To avoid inadvertently leaving yourself open to legal challenge, it is important to understand the types of statements and representations that can found the basis of a claim; what exactly is a legal misrepresentation; and what remedies flow when a misrepresentation occurs.

What is misrepresentation?

A misrepresentation is: an untrue statement of fact or law; upon which a party relies in being induced to enter a contract; and which thereby causes the relying party to suffer loss.

Misrepresentations can:

be express written or oral statements
be implied by words or by conduct
be made when making plans or projections for the future
arise via half-truths
arise where a statement was true when made, but later becomes untrue if circumstances change. Here, the representing party has a duty to update/revise his or her statement
occur more readily in relationships of utmost good faith (such as partnerships or contractual arrangements requiring full disclosure).

There are three different types of misrepresentation, each giving rise to different remedies for the party who has suffered loss.

Fraudulent misrepresentation is the most serious and requires the false representation to have been made knowingly, without belief in its truth, or recklessly as to its truth. A successful claimant may have the contract set aside (or ‘rescinded’) and seek enhanced damages.
Where the parties have entered into a contract, a claim for negligent misrepresentation is available (in addition to any possible breach of contract claim) where the misrepresentation was made carelessly or without the representor having reasonable grounds for believing its truth. Here, the claimant may seek rescission and/or damages [1] (as well as any possible breach of contract damages).
An innocent misrepresentation occurs where a misrepresentation was made but the maker can show that he had reasonable grounds to believe its statement was true. In these circumstances, a claimant is not entitled to damages, but he or she may be entitled to rescind the contract.

Fraudulent misrepresentation – a supply chain case

In a recent High Court case [2] the parties had reached an agreement in principle for a supplier based in the Netherlands (the representor) to supply egg products to a company based in the US (the representee), but that was dependent on the US regulatory authorities approving the supply. When the approval was granted, contract price renegotiations ensued. The representor then provided an ‘estimate’ of its increased costs associated with complying with US regulatory requirements as a justification for a price increase. In fact, the cost increased figure did not represent a genuine estimate and the representor knew that. The representor also knew that the increased figure included additional profit. There was no doubt, therefore, that there had been a fraudulent representation, but the question for the court was whether that induced the representee to enter into the contract.

The court held that the relevant test is whether, ‘but for’ the representation, the representee would not have entered into the contract.

In addition, the court specifically clarified that it is sufficient for a representee to establish that a misrepresentation was a factor in its decision to enter the contract – importantly it need not be the only or the deciding factor.

All that effectively translates to there being a presumption that the fraudulent misrepresentation did induce the claimant to enter the contract. It is, of course, notoriously difficult to prove a negative, plus there is a high evidential burden in any case involving fraud.

Businesses should note that claimants may be more willing to pursue misrepresentation claims – even fraudulent misrepresentation claims – in light of this case.

Practical advice

There are a number of practical points and best-practice tips arising from this case, and from the law of misrepresentation generally, of which all retail businesses should be aware.

Take care to ensure that marketing material and all forms of pre-contract communications are accurate…
…and that they are checked and kept accurate and up-to-date on an ongoing basis.
Beware providing ‘estimates’ of costs, facts or figures as a negotiating tactic unless these can be confidently backed-up with reliable evidence/calculations.
Prior to conclusion of any contract, check whether any circumstances or key terms have changed since communications and negotiations began. If they have, make sure that all parties are aware and remain happy to proceed before you complete.
Educate sales staff and negotiators as to the dangers of misrepresenting facts or projections.
If you think you may have suffered loss having relied on a misrepresentation, act quickly. Take specialist legal advice immediately to ensure that you do not prejudice your rights to claim any particular remedies.
Any potential claimant must ensure that its claim is formulated correctly. Ask your legal advisor to consider which type or types of misrepresentation should found your action and whether there may also be any potential to bring a breach of contract or tortious negligent misstatement claim.
When considering any negligent or innocent misrepresentation claim, assess whether or not the right to rescind the contract remains.
Parties may also limit or exclude liability for misrepresentation by inserting appropriate exclusion, non-reliance or ‘entire agreement’ clauses into their commercial contracts.

For further advice or assistance on misrepresentation or on exclusion/non-reliance/entire agreement provisions, please do not hesitate to contact Tim Pickworth or any member of Walker Morris’ Commercial Dispute Resolution or Retail Teams.

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[1] The measure of damages in these cases will be the tortious measure – that is, to restore the claimant to its pre-misrepresentation position
[2] BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises Inc [2018] EWHC 1857 (Comm)

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Gwendoline Davies - Partner, Commercial Dispute Resolution at Walker Morris LLP

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James Crayton
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Martin McKeague - Partner, Real Estate Litigation at Walker Morris LLP.

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Jane Weaver, Partner, Real Estate, Walker Morris

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