Factual and Procedural Background
This appeal arises from a judgment by Judge Teare concerning two distinct legal issues in a commercial contract dispute between two companies, Company A (the buyer) and Company B (the seller). The dispute concerns contracts for the supply of egg products during an avian flu epidemic in the United States in 2015, which severely affected suppliers. Company A contracted with Company B to purchase large quantities of dried egg products over two years, subject to regulatory approval. Following regulatory approval, Company B requested and obtained an increase in prices, allegedly due to extra regulatory costs. Shipments commenced, with some product supplied by a third company within the same corporate group as Company B but not party to the contract. Company A later alleged that Company B had fraudulently misrepresented the basis for the price increase and suspended performance, leading to Company B commencing proceedings for loss of profit. The initial judgment found that Company B's product complied with regulations and that the price increase included a profit element, constituting fraudulent misrepresentation. The judge held Company A was entitled to rescind the second contract and restricted Company B's claim accordingly. The judge also held that Company B could not claim losses relating to the third company's supplied product. Both these rulings gave rise to the appeals now before the court.
Legal Issues Presented
- Whether the requirement of inducement in fraudulent misrepresentation cases differs from that in innocent or negligent misrepresentation cases, specifically regarding the burden of proof on the representee or representor.
- What precisely must be proved to establish inducement: whether the representee would not have entered the contract but for the misrepresentation, whether the representation played some part in the decision, or whether it is sufficient that the representee might have acted differently.
- Whether, on the facts found by the judge, the right to rescind for fraudulent misrepresentation was established.
- Whether a contracting party can recover losses suffered by a non-contracting party (a third party supplier) when the contract is performed partly by the contracting party and partly by the third party with the consent of the buyer, in the event of breach by the buyer.
Arguments of the Parties
Appellant's Arguments (Company B)
- The burden of proof for inducement in fraudulent misrepresentation cases lies on the representee (Company A), as in innocent misrepresentation cases.
- Company A's chief executive could not definitively state what Company A would have done if it had known the true facts, which should be sufficient to rebut the presumption of inducement.
- Regarding the second issue, Company B contended that it was entitled to recover losses suffered by its sister company (the third party supplier) under the principle of transferred loss.
- Argued that the broader ground for transferred loss should apply even though the third party was not known to the buyer at the time of contract formation and that the contract was partly for the benefit of the third party.
Appellee's Arguments (Company A)
- There is a presumption of inducement in fraudulent misrepresentation cases, placing the evidential burden on Company B to prove that Company A would have entered the contract regardless of the misrepresentation.
- The inability of Company A's chief executive to state what would have been done if the true facts were known is irrelevant; the misrepresentation was material and successful in inducing the contract.
- Company B cannot recover losses suffered by the third party supplier because the third party was not a contracting party, was not known to Company A at the time of contracting, and the contract was not intended to benefit the third party.
- The principles of transferred loss require a known intention to benefit the third party at contract formation, which is absent here.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Reynell v Sprye (1852) 1 De G. M.&G. 660 |
Presumption of inducement in fraudulent misrepresentation cases; no contract resting on fraud can stand. |
Used to support the presumption that a fraudulent representation induces the contract and that the burden lies on the representor to rebut inducement. |
| Smith v Chadwick (1884) 9 App. Cas 187 |
Burden on claimant to prove reliance and inducement; inducement is a question of fact. |
Considered in relation to burden of proof and nature of inducement; court rejected reversal of burden of proof. |
| Edgington v Fitzmaurice (1885) 29 Ch.D. 459 |
Materiality and influence of misrepresentation; misrepresentation need not be sole cause but must influence decision. |
Applied to clarify that a representation need only be one cause of entering contract, not the sole cause. |
| Barton v Armstrong [1976] AC 104 |
Burden of proof in duress and fraud cases; representor must prove that inducement did not affect decision. |
Supported the view that burden of proof shifts to representor to rebut presumption of inducement in fraud cases. |
| Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 A.C. 501 |
Requirement of inducement for contract avoidance; presumption of inducement in fraud cases. |
Confirmed the need for inducement and presumption of fact that fraudulent misrepresentation induces contract; cited as modern authority. |
| Zurich Insurance v Hayward [2017] AC 142 |
Material cause standard for inducement; belief in truth not necessary. |
Confirmed that representee need only show misrepresentation was a material cause of contract, not that they believed it wholly. |
| Linden Gardens Trust v Lenesta Sludge Disposals [1994] 1 AC 85 |
Transferred loss principle; contracting party may recover loss suffered by third party if contract intended to benefit third party. |
Applied to reject claim for losses of third party supplier absent known intention to benefit third party at contract formation. |
| Alfred McAlpine Construction Limited v Panatown Limited [2001] 1 AC 518 |
Clarification of transferred loss principle; distinction between narrow and broader grounds. |
Used to explain that transferred loss requires known intention to benefit third party and that absent this, claim fails. |
| Swynson v Lowick Rose LLP [2017] UKSC 32; [2018] AC 313 |
Transferred loss is a narrow exception requiring known intention to benefit third party. |
Confirmed that absence of known intention to benefit third party at contract formation precludes transferred loss claims. |
| Lowick Rose LLP v Swynson [2017] UKSC 32 |
Reinforces principle that loss must be suffered by claimant or that transferred loss requires known benefit to third party. |
Supported rejection of transferred loss claim in absence of contract intended to benefit third party. |
Court's Reasoning and Analysis
The court first examined the question of inducement in fraudulent misrepresentation cases. It reviewed Victorian and modern authorities, concluding that there is a presumption of fact that a fraudulent misrepresentation induces the representee to enter into the contract. This presumption places an evidential burden on the representor to prove that the representee would have entered into the contract notwithstanding the misrepresentation. The court rejected the argument that the burden lies on the representee to prove inducement in fraud cases, affirming that the burden remains on the representee but that the presumption of inducement is very difficult to rebut.
The court further clarified that inducement requires the representee to have been materially influenced by the misrepresentation, meaning that the misrepresentation was actively present in the representee’s mind when the contract was made. It rejected any dilution of this requirement to mere possibility or hypothetical influence.
Applying these principles to the facts, the court accepted the judge’s factual findings that Company A’s chief executive had multiple reasons for entering the contract, including securing supply quickly and price viability, but that the fraudulent misrepresentation regarding the cost basis of the price increase was one of the reasons influencing the decision. The court held that the presumption of inducement was not rebutted by the equivocal evidence of the chief executive, who could not say what would have happened had the true facts been known. The judge’s conclusion that Company A was induced was upheld.
Regarding the second issue of transferred loss, the court examined the principle that a contracting party may recover losses suffered by a third party only if the contract was intended to benefit that third party and that intention was known at the time of contracting. The court found that the third party supplier was not known to Company A at the time of contract formation, and the contract was not intended to benefit it. The third party was effectively a subcontractor to Company B, with no contractual relationship with Company A. The court rejected the claim for transferred loss on these grounds, noting that allowing such recovery without known third party benefit would undermine the narrow exception that transferred loss represents. The court also considered and rejected the argument that common ownership or family ties between Company B and the third party supplier affected this conclusion.
Holding and Implications
The court DISMISSED both appeals.
It held that the presumption of inducement in fraudulent misrepresentation cases remains a presumption of fact, difficult to rebut, and that the burden of proof does not shift to the representor to disprove inducement. The representee must show that the misrepresentation materially influenced the decision to contract. On the facts, the court found that Company A was induced by the fraudulent misrepresentation and was therefore entitled to rescind the second contract.
Regarding transferred loss, the court confirmed that a contracting party cannot recover losses suffered by a third party unless the contract was intended to benefit that third party and that intention was known at the time the contract was made. Since the third party supplier was unknown and the contract was not intended to benefit it, Company B could not recover losses suffered by the third party. This preserves the narrow scope of the transferred loss exception.
The decision directly affects the parties by upholding the rescission of the second contract and limiting recovery to losses suffered by Company B itself, excluding losses of the third party supplier. The opinion does not establish new legal precedent but reaffirms established principles concerning inducement in fraudulent misrepresentation and the scope of transferred loss claims.