Fraudulent misrepresentation – a supply chain case

11th December 2018

Walker Morris 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 A successful claimant may have the contract set aside (or ‘rescinded’) and seek enhanced damages.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 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)