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Reliance in deceit and claim for “transferred loss” in sale of goods contract

BV Nederlandse Industrie Van Eiprodukten v Rembrandt Entreprises Inc [2019] EWCA Civ 596 (CA)

On 9 April 2019, the Court of Appeal handed down judgment in a sale of goods case that (a) seeks to provide clarity on the test for reliance in deceit claims, and (b) considers (and rejects) a “transferred loss” argument where the claimant sought to recover losses suffered by a third party.

Facts

The defendant (R) was a supplier of egg products in the US.  The claimant (N) was a supplier of such products, based in the Netherlands.  In April 2015 a disastrous avian flu epidemic struck the US, leading to the destruction of 50% of R’s birds.  R needed to find an alternative supplier of egg products, whose procedures satisfied the US regulatory authorities.

On 13 May 2015, R entered into a 2-year contract with N at certain fixed prices (“First Contract”).  On 1 June 2015, the US authorities gave the requisite approval of N’s procedures.  Following this, N proposed a price increase to the contract to cover unanticipated regulatory costs.  After some negotiation, on 25 June 2015, a second contract was entered, including the price increase (“Second Contract”).

After shipments began, N informed R that some of its product would be supplied by its sister company (H) who had also received the requisite regulatory approval (H was effectively a sub-contractor).  A few months into the contract, R asserted that N had failed to comply with US inspection requirements and suspended the contract.

N claimed for loss of profit, based on goods supplied to be by it together with those supplied by H.  R defended the claim on various bases including that the Second Contract was induced by fraudulent misrepresentations that the increased price was calculated only by reference to increase costs, but in fact had included an element of profit.

Trial judgment

The first instance judge (Teare J) held that ([2019] 1 All ER Comm 543):

1. R was not entitled to suspend its performance as N did comply with the US regulatory requirements;
2. False representations were made by N that the price for the Second Contract were based solely on additional costs (whereas there was a “profit” element);
3. There was a presumption of reliance by R on such representations that V was unable to rebut, despite R’s CEO being unable to say what he would have done had he known the truth;
4. R was entitled to rescind the Second Contract and V’s claim for los of profit was restricted to sums claimed based on the First Contract;
5. V was unable to recover for loss of profit for goods to be supplied by H.

V appealed against findings 3 and 5.

Court of Appeal

The Court of Appeal (Longmore LJ, Peter Jackson LJ, Coulson LJ) dismissed the appeal.

Reliance in deceit  

The Court of Appeal (Longmore LJ giving the leading judgment on this issue) considered various authorities, with a particular focus on the Victorian era, relating to proof of reliance in deceit claims.  The judgment sets out the following principles:

1. If a representor fraudulently intends his words to be taken in a certain sense and the representee understands them in that sense and enters into a contract, it is likely to be inferred that the representee was induced to enter into the contract on the faith of the representor’s statement (“Presumption of Inducement”) [25];
2. The Presumption of Inducement is a presumption of fact which can be rebutted, and must be assessed based on all of the available evidence [25];
3. The burden of proving inducement/reliance remains on the representee and the fact that the court may start by making a presumption of fact in his favour does not change that position [25];
4. The representee must prove that he had been materially “influenced” by the representations in the sense that it was “actively present to his mind” [32];
5. There is no requirement in law that the representee should state in terms that he would not have made the contract ‘but for’ the representation, but the absence of such a statement is part of the overall evidential picture from which the judge must assess whether there has been inducement [32];
6. The fact that there were other reasons (besides the representation) for the representee to have made the contract does not mean that he was not induced by the representation [32].

The Court of Appeal considered the obiter suggestion from earlier cases that it is sufficient for the representee to show that he “might” have acted differently, and observed that this has the potential to cause ambiguity, based on how the word “might” is interpreted [44]-[45].  Consequently, it chose not to endorse this language.

Applying these principles to the facts, the Court of Appeal held that the Presumption of Inducement had not been rebutted at trial, given Teare J’s finding that he was not persuaded R would have entered into the Second Contract at the corresponding price increase, had the false representation not been made [49].

Transferred loss

The Court of Appeal (Coulson LJ giving the leading judgment on this issue) considered the leading authorities on the “transferred loss” principle (including The Albazero [1977] AC 774, Linden Gardens [1994] 1 AC 85 and Panatown [2001] 1 AC 518).  In such cases, a contracting party seeks to recover losses suffered by a third party (“3P”), where it is foreseen that damage caused by breach might cause loss to a third party.  This argument typically arises where property that is the subject of the contract is transferred to the ownership of a 3P.  In a sale of goods contract, it is a novel argument

The application of the broader ground principle has been the subject of doubt in Panatown, and in some later cases, but the Court of Appeal expresses the view that it is still good law [70].

Importantly, the broader ground principle requires that at the time the underlying contract is made there was a common intention and/or known object to benefit the third party or a class of persons to which the third party belonged [69,72].

For this reason, the “transferred loss” claim was bound to fail because V did not make R aware until after the contract was entered that H would be supplying some of the goods.

In view of this, the Court merely expressed an obiter view as to the extent to which the broader ground might apply in the sale of goods context, observing that “it will depend on the particular contract in question” [78].  Notably, it did not reject the argument as a matter of principle, nor did the Court find that the fact that H had a contractual right of recovery against V meant there was no legal “black hole”.  In such circumstances, the inability of V to look to R for losses claimed against it by H, might be enough to establish the necessary “black hole” [79].

The decision is of interest because it leaves the door wide open for a transferred loss argument to be run in another sale of goods case.  My sense is that Courts are likely to adopt a restrictive approach, but it will be interesting to see.

Watch this space.

Nick Goodfellow (2009 call) is a commercial litigator that has considerable experience of civil fraud claims.