Recovery of group company losses
Nederlandse Industrie Van Eiprodukten v Rembrandt Enterprises, (Court of Appeal) [2019]
In the vast majority of cases contracts are entered into by corporate customers for the benefit of their group. Equally, suppliers will often enter contracts through a single representative company but with different companies within the group playing an active role in the performance of the contract whilst generating a share of the profits at the same time. In both scenarios group companies will incur losses if the contract is wrongly terminated and this case considered the extent to which such losses can be recovered in the absence of an express provision to that effect.
Facts:
Rembrandt was a supplier of egg products in the US. It suffered a serious shortage of supplies following an avian flu outbreak in the US. It entered into a contract with 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.
Shipments began in September 2015 and later that month NIVE informed Rembrandt that approximately 50% of the egg products would in fact be supplied by Henningsen van den Burg (“Henningsen”), a sister company to NIVE. It was common ground that at no time prior to the making of the contract did NIVE ever communicate that intention to Rembrandt.
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 under the contract, including in respect of the Henningsen element.
Decision:
At first instance the judge 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.
The Court of Appeal agreed with the High Court judge. 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.
Previous cases 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 (A) has an interest in ensuring the third party (C) 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. The broader application of the principle provides an avenue for A to recover from B 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 against B.
The court concluded that it is a critical component of a claim for transferred loss that – at the time of entering into the 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 Henningsen was a sub-contractor to NIVE without any rights or liabilities under NIVE’s contract with Rembrandt although it did invoice Rembrandt directly. 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 therefore no known third party benefit.
Points to Note:
- Contracts should always take into account the extent to which performance by the supplier will be sub-contracted to other group companies and, in the case of the customer, benefits to be received under the contract will be passed on to other group companies.
- Relatively simple drafting can anticipate such scenarios and:-
- in the case of the contracting supplier expressly authorise such sub-contracting whilst at the same time entitling it to recover losses incurred by the broader supplier group (through ‘shepherded’ claims);
- in the case of the contracting customer, expressly authorise the benefits to be received under the contract to be shared within the corporate group (including the granting of appropriate sub-licences to relevant intellectual property rights) and to likewise recover losses incurred by the broader customer group.
- Consideration should, perhaps, also be given as to whether the Contracts (Rights of Third Parties) Act 1999 should be invoked or whether more formal contract assignments should be prepared.