Kellie Williams-Jauvel, Partner in our Dispute Resolution team at our Wimbledon office revisits the discussions around the “but for” test in fraudulent misrepresentation claims in our September edition of our Corporate Insights newsletter.
If one party enters into a contract as a result of a false representation made by the other party, he may be able to rescind the contract, putting him back in the position he would have been in, had the contract not been made.
In order to rescind the contract, the party that has been enticed into the contract needs to show that if the position had not been misrepresented to him, he would not have entered into the contract. This is why the test is often referred to in shorthand as the “but for” test. The correct test to apply in fraudulent misrepresentation cases has recently been considered in BV Nederlandse Industrie Van Eiprodukten (NIVE) v Rembrandt Enterprises In (Rembrandt) which considered whether the correct test is the more absolute “but for” [the representation] the claimant would not have entered into the contract, or the weaker “but for” [the representation] the claimant might not have entered into the contract.
In May 2015 the parties entered into a contract for the supply of dried egg products. NIVE in the Netherlands was to supply the egg based products to Rembrandt in the US.
At the time the parties entered into the contract there was an outbreak of avian flu and the contract was subject to NIVE obtaining approval from the US regulatory authorities. Regulatory approval was obtained in June 2015 and the price for the products was renegotiated. The renegotiated price was influenced by the costs NIVE said that it would incur in complying with US regulatory procedures.
In June 2016 Rembrandt formed the view that NIVE’s egg products did not comply with the regulations and rejected the products. NIVE claimed damages for breach of contract and Rembrandt denied liability and relied on the defence that the renegotiated price which it had agreed had been fraudulently misrepresented to it by NIVE.
NIVE’s position was that the cost to it of complying with US regulations was an estimate; but Rembrandt had relied on this figure when it had agreed to the renegotiated price. Rembrandt said that if it had known that the figure presented by NIVE as the cost for complying with the US regulations was in fact largely profit, Rembrandt would not have agreed to the renegotiated price.
Mr Justice Teare concluded that the fraudulent misrepresentation by NIVE of the additional costs for complying with regulations was made with the very purpose of persuading Rembrandt to agree to the price increase. Rembrandt had taken this cost into consideration when agreeing to the price increase. While it was not Rembrandt’s sole consideration, NIVE could not show that Rembrandt would have agreed to the price increase without the fraudulent misrepresentation. The weaker test was the appropriate test to apply.
In cases of fraudulent misrepresentation the weaker form of the “but for” test is appropriate. Rather than showing that “but for” the misrepresentation, it would not have entered into the contract, the claimant only has to show that but for the misrepresentation, it might have acted differently.