Rescission for misrepresentation: a lower hurdle for claimants in cases of fraud

Bv Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises, Inc.

[2019] EWCA Civ 596

Those seeking to unravel a contract on the basis of a pre-contractual fraudulent statement will not have to show that the statement in question was the reason they entered into the contract in order to succeed in their claim. The Court of Appeal has confirmed that it will be enough for a claimant to show that the false statement "materially influenced" their decision to enter into a contract, or that it was "actively present to his mind" to prove that they were induced by the statement[1].

The test for inducement where there is no fraud – i.e. where false statements and assurances were given negligently but not deliberately or recklessly – is stricter. To succeed in claiming damages or rescinding a contract in such cases, a claimant will still need to show that it would not have entered into the contract with the defendant but for the relevant statements.

The Court of Appeal's decision

In this case, the supplying party under a supply contract sought to negotiate a higher price with the customer part way through performance. The reason for the request given by the supplier was that its costs had increased for reasons beyond its control. The customer agreed to the price increase and entered into a new contract, but later discovered that this increase included an element of profit for the supplier, in addition to the increase in its costs. The supplier had fraudulently misrepresented the reasons for the price increase and the customer applied for the contract to be set aside (known as "rescission").

A key argument from the supplier against the claim was that there was no evidence that the customer would not have agreed to the new contract had it not been for the fraudulent statement. However, the Court of Appeal held that, although the burden of proof was on the representee to show that he had been induced, in cases of fraud he would not need to show that he would not have entered into the contract had the statement not been made. There was a rebuttable factual presumption where fraud was involved that the claimant had been induced. 

Lesson: be careful of what you promise!

This decision will be welcomed by those tendering for IT and technology services who, in deciding how to award a contract, must rely on assurances given by prospective suppliers in tender submissions and pre-contractual discussions – particularly with regards to their ability to resource a project, meet certain timescales or complete the work to a fixed cost. This decision means that the test for succeeding in a claim against a supplier who dishonestly or recklessly gives false assurances will be more easily met.

Suppliers should therefore consider carefully the assurances they give in pre-contractual discussions and ensure that tender submissions are closely scrutinised. Whilst it is possible – and indeed common - to include a "non-reliance" provision in supply agreements, it is not possible to exclude liability for fraud. Indeed, as many IT suppliers may be aware as a result of the BskyB v HP Enterprises case, negotiated caps on liability are also lifted where losses are suffered as a result of fraud.

Remember fraud is still a high bar…

It is worth bearing in mind that a Court won't make a finding of fraud lightly. Such decisions necessarily hinge on a close examination of the knowledge and intention of the key individuals involved. In most cases, misrepresentations are not fraudulent and therefore the higher test for inducement will still apply.

[1] Para 32