Court of Appeal confirms no claim for third party's loss unless common intention to benefit the third party at the time of contracting

The Court of Appeal has held that, where a buyer wrongly terminated a two year contract, the seller could only claim its own loss of profit and not that of a sister company that was supplying 50% of the products in question: BV Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises, inc [2019] EWCA Civ 596.

The decision confirms that a party to a contract can claim for a third party's losses resulting from a breach, as an exception to the usual rule, only if at the time the underlying contract was made there was a common intention to benefit the third party (or a class of persons to which the third party belonged).

As a practical matter, contracting parties should think carefully about arrangements which effectively allow a group company or other third party to take on all or part of the benefit of a contract, where that was not envisaged at the time of contracting and there is no formal assignment. Such arrangements may mean that there is no recoverable loss in the event of a breach, or the recoverable loss is reduced.

The decision is also of interest for its discussion on the requirement of inducement/reliance in cases of fraudulent misrepresentation. The decision confirms that the requirement differs from negligent or innocent misrepresentation. In cases of fraudulent misrepresentation (i) there will be a rebuttable evidential presumption of fact (not an irrebuttable inference of law) that the representee was so induced to enter into the contract and (ii) that what must be proved is that he or she was influenced by the representation, in the sense that it was actively present to their mind.

Ben Steed in our disputes team considers the decision further below.

Background

The defendant ("Rembrandt") was a supplier of egg products in the US. It suffered a serious shortage of supplies following the US avian flu outbreak. It entered into a contract with the claimant ("NIVE"), a Netherlands-based egg supplier, to buy 4200 metric tons of egg products over a two year period, provided that NIVE's production process satisfied US regulatory authorities. The contract was governed by English law.

NIVE subsequently emailed Rembrandt to ask for an increase to the agreed price owing to unanticipated extra costs of regulatory compliance. After some negotiation, Rembrandt agreed. The parties signed a second contract with terms identical to the previous contract, save for the increase in price. Shipments began in September 2015 and later that month NIVE informed Rembrandt that some of the egg products (approximately 50%) would be supplied by Henningsen van den Burg ("Henningsen"), a sister company to NIVE. Henningsen and Rembrandt were to deal directly with invoicing and payment for the Henningsen product.

At around the same time, the price of egg products began to fall. Rembrandt suspended its performance of the contract and alleged that NIVE had failed to comply with US inspection requirements.

NIVE brought proceedings against Rembrandt for loss of profit on the total amount to be supplied, including in respect of the Henningsen product. One of Rembrandt's arguments in defence was that the email requesting an increase in price amounted to a fraudulent misrepresentation that the increased price was calculated by reference only to the extra regulatory costs, whereas in fact it also included an element of profit.

First instance decision

The High Court (Teare J) held that Rembrandt could rescind the second contract. NIVE's email regarding the increased compliance costs did amount to a fraudulent misrepresentation, which had induced Rembrandt to enter into the second contract. Following his review of the authorities and facts, the judge held that the law created a presumption of fact - resulting from the fraudulent nature of the misrepresentation - that Rembrandt had relied on the representations and that the evidence in this case did not have the clarity and cogency necessary to rebut that presumption.

The judge also held that, under the original contract, NIVE could only claim for its own loss and not for the loss of profit suffered by Henningsen. Having reviewed the relevant authorities, he concluded that for the principle of transferred loss to apply (as an exception to the normal rule that a claimant can only recover damages for its own loss) both parties must have intended, pre-contract, to confer a benefit on the relevant third party.

Court of Appeal decision

The Court of Appeal (Longmore, Peter Jackson and Coulson LJJ) dismissed the appeal and agreed with the High Court judge on both issues. Longmore LJ gave the leading judgment on the inducement/reliance issue and Coulson LJ in relation to the transferred loss issue.

Inducement/reliance

The court observed that the test for inducement in cases of innocent or negligent representation appears to be settled - the representee has the burden of showing inducement in that they would not have entered into the relevant contract had the representation not been made.

The court held, however, that where a fraudulent representation has been made, intending to cause the representee to enter into the contract, there is an evidential presumption of fact (not of law) that the representee was induced to enter into the contract. This presumption of inducement creates an inference that can be rebutted (unlike an inference of law, which cannot be rebutted or can only be rebutted in a particular way) but is "very difficult to rebut". This does not change the onus of proof - the legal burden of establishing inducement/reliance remains with the representee – it is just that the court may start from the presumption that, as a matter of fact, he or she did rely on the representation.

To discharge the burden, the representee does not need to show that the statement was the only reason it entered into the contract, but it is not enough to show that, absent the representation, the representee might not have done so. Instead, a representee has to prove that they had been materially "influenced" by the representation in the sense that it was actively present to their mind. The fact that there are other reasons (besides the representation) for a party to make a contract, or that they "might" have made the contract absent the representation, does not mean that they are not induced by the representation made.

On the facts, NIVE argued that Rembrandt was very keen to obtain the egg products in any event, as its customers were in seriously short supply. However, the Court of Appeal saw no basis to interfere with Teare J's conclusion. The evidence established Rembrandt might have agreed to the price increase absent the fraudulent representation, but not that it would have done so. The presumption of inducement had not been rebutted in this case.

Transferred loss

The principle of transferred loss provides a limited exception to the general rule that a claimant can recover only loss which they have themselves suffered. Where the principle applies, and there is a breach of contract leading to a third party suffering harm, the contracting party has a right of recovery.

In the present case, the Court of Appeal reviewed the relevant authorities in some detail. Those authorities distinguish between the “narrow” application of the principle (where the third party suffers loss as the intended transferee of property affected by the breach) and the “broader” application (where the contracting party has an interest in ensuring the third party receives the benefit it was intended to have). The court considered that the broader application of the transferred loss principle was correct in this case.

Under the broader ground, the contracting party (A), although not themselves suffering the physical or pecuniary damage sustained by the third party (C), suffers their own damage being the loss of their performance interest (ie the failure to provide C with the benefit that B had contracted for C to receive). The broader ground provides an avenue for A to recover for the loss of its performance interest (measured by the cost of securing the performance of the bargain), but does not create any direct right of action for C.

Based on its review of the authorities, the court concluded that it is a critical component of a claim for transferred loss that – at the time of entering into the underlying contract – there was a common intention and/or a known object to benefit the third party or a class of persons to which the third party belonged.

On the facts of this case, to all intents and purposes, Henningsen was a sub-contractor to NIVE without any rights or liabilities under NIVE's contract with Rembrandt. The court held that the contract between NIVE and Rembrandt was not for the benefit of Henningsen; it did not transfer any rights to Henningsen and any possible benefits to Henningsen were not known at the time of entering into the contract. Nor did Rembrandt know of Henningsen's existence or NIVE's intention to use Henningsen. There was no known third party benefit.