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Case law: Misrepresenting your costs in contract negotiations can result in the other party rescinding the contract

Parties negotiating a contract and tempted to over-estimate their costs as a negotiating tactic could lead to a successful claim against them for fraudulent misrepresentation, and rescission of the contract, a recent ruling makes clear.

February 2019

This update was published in Legal Alert - February 2019

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

A Dutch supplier agreed to provide dried egg products to a company in the USA. This followed egg shortages in the US after an outbreak of avian flu. The contract was conditional on the US authorities approving the Dutch regulatory procedures governing the supplier’s business. The US authorities gave approval but the supplier claimed that their extra requirements would incur extra compliance costs of €2.50 per kilogram. The supplier therefore insisted on negotiating a higher price for its products. However, egg prices in the US dropped dramatically and the Americans considered they were paying too much.

The US company audited the supplier and claimed to have found multiple infringements of the warranties in the agreement. This meant the product was not fit for human consumption in the USA. The US company refused to accept any new shipments and sold what it already had for use in pet food at a much lower price.

The supplier claimed €19m for breach of contract and the US company purported to rescind the contract. This was on grounds that the supplier had fraudulently misrepresented the extra costs of complying with the US regulatory requirements during renegotiation of its prices.

The High Court found that the level of costs the supplier claimed it would incur had been a negotiating tactic and not a genuine estimate, so it amounted to a fraudulent representation. The Court then applied the ‘but for’ test. It said that in cases of negligent misrepresentation, this meant deciding whether, if the misrepresentation had not been made (ie, ‘but for’ the misrepresentation), the other side would have entered into the agreement on the terms it did.

However, it ruled that the ‘but for’ test was less strict in cases of fraudulent misrepresentation than negligent misrepresentation. The US company only had to show that it might not have entered into the agreement on the terms it did had the fraudulent misrepresentation not been made.

The Court ruled that the fraudulent misrepresentation was one of three factors the US company took into account, which was enough to satisfy the ‘but for’ test.

Operative date

  • Now

Recommendation

  • Parties negotiating a contract and tempted to over-estimate their costs as a negotiating tactic should be aware this could result in a successful claim against them for fraudulent misrepresentation in the courts, and rescission of the contract.

Case ref: BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises Inc [2018] EWHC 1857

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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