Avoiding Dirty Tricks In Contract Negotiations

Businesses must exercise caution when negotiating new contracts, particularly on the issue of costs and pricing. If costs are misrepresented or over-estimated, there is a risk that the other party could rescind the contract and claim fraudulent misrepresentation, as a recent case illustrates.

What's the background?

Following an outbreak of avian flu in the US when millions of birds had to be slaughtered, a US supplier of egg-based products needed new supplies of dried egg products and negotiated a contract with a Dutch supplier. The agreement was subject to the US regulatory authorities approval of the procedures in the Netherlands for the regulatory supervision of the egg business. Once approval was given, the price was renegotiated upwards because of the additional costs associated with complying with the US regulations.

However, the figures presented by the Dutch supplier were intended to be accepted by the US as a genuine estimate of costs, whereas the evidence showed the figures actually included "an element of profit or buffer". Following an audit of the Dutch company's production processes, the US Company decided that they did not comply with US regulations and rejected the Dutch Company's products. The US company refused to accept further shipments and claimed (among other things) fraudulent misrepresentation.

The High Court ruled that the costs put forward by the supplier amounted to a negotiating tactic and was not a genuine estimate of its costs. On the evidence, the...