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07 April 2015
In a recent deceit claim the High Court rejected(1) what it described as an ingenious argument by the defendant, which sought to rely on Gross v Lewis Hillman(2) as establishing a general proposition that where a representation is made by a contracting party which is relied on by the other contracting party in entering the contract, it becomes 'spent' such that it cannot then be relied on by third parties. On the facts of the present case, the judge found that such a proposition would lead to a "commercially absurd" result.
The case also touched on a number of other interesting issues, such as the correct measure of damages in deceit cases; this update, however, focuses on the spent representation issue.
Claimant Petrom, a Romanian oil company, claimed against defendant Glencore International AG, an Anglo-Swiss multinational commodity trading and mining company, for deceit and conspiracy arising from a fraud committed in the period from 1993 to 1996. The fraud had been committed by the precursor company to Glencore (which is referred to as 'Glencore' for simplicity) against SC Rafirom SA, which in 1996 merged with another company to become SC Compania Romana de Petrol SA (CRP) and was later privatised to form Petrom. Rafirom/CRP was the state-owned company with overall responsibility for the import and refining of crude oil and export of petrochemical products in Romania during the relevant period (which is subsequently referred to as 'Rafirom' in this update).
Another state-owned company, Petrolexportimport SA (Petex), organised the import of crude oil into Romania in the relevant period. Petex entered into all contracts with third parties for the supply of crude oil as principal, acting as a commission agent for Rafirom. Petex, as agent for Rafirom, checked the documentation which it received (eg, bills of lading and certificates of quality) against the relevant contract to ensure that all was in order.
The basis for Rafirom's claim in deceit was that Glencore falsely represented that various shipments of crude oil were of a particular type, when in fact they were a blend of other oils. A total of 32 shipments made by Glencore to Petex which provided for the supply of either Iranian Heavy or Gulf of Suez Mix (GOSM) did not contain either type of crude oil. Instead, what was supplied was a cheaper blend of various other crude oils, designed to resemble either Iranian Heavy or GOSM. In each case, Glencore created or procured the creation of a suite of false documents which falsely represented that the cargoes were Iranian Heavy or GOSM. Petrom argued that, in reliance on and induced by those representations, Rafirom accepted and paid for each cargo in the belief that it comprised that particular crude oil.
Although there was no direct evidence of cost, the court inferred that Glencore could have purchased and created the blended oils more cheaply than the Iranian Heavy and GOSM for which it charged Rafirom. It was argued, and the court agreed, that had Glencore disclosed the true position, Petex and/or Rafirom could have rejected the cargo and purchased the recognised grade elsewhere or renegotiated the price downwards to reflect the lower value of the bespoke blend.
Petex was unaware of the fraud until it was informed by a former trader from Glencore in about May 2002 (although Glencore sought unsuccessfully to argue that Petex had been aware of the fraud from the outset). It was not until April 2006 that Petex informed Petrom of the fraud, shortly after the outcome of an arbitration that it had initiated against Glencore was published.
Petrom commenced proceedings against Glencore (and against another group company and two Glencore employees) on April 30 2008. These proceedings were stayed by standstill agreements pending the outcome of arbitration proceedings also initiated by Petrom against Glencore. Following the failure of the arbitration proceedings and the expiry of the standstill, Petrom resumed its claim, which was amended so that Glencore became the sole defendant, it having accepted vicarious liability for the other defendants.
The court set out the four 'ingredients' of the tort of deceit, quoting their recent restatement in the Court of Appeal decision in Eco 3 Capital Limited v Ludsin Overseas Limited:(3)
Glencore disputed that the second and third ingredients could be established on the basis that any representation had been made only to Petex and was not intended to travel any further than Petex or was spent before it came to Rafirom. Glencore sought to derive this principle from the decision of the Court of Appeal in Gross v Lewis Hillman, which the court considered in detail.
In Gross v Lewis Hillman a property company agreed to purchase a shop as a result of alleged fraudulent misrepresentations about the shop's tenant made by the first and second defendants. The property company then advised the claimant that the property was a suitable investment (based on the alleged fraudulent misrepresentations) and assigned the benefit of its purchase contract to the claimant in exchange for a commission. The shop tenant was unsuccessful in its trading and after three months became insolvent and went into liquidation. The claimant sought an order rescinding the conveyance and damages for deceit on the grounds of fraudulent misrepresentation.
The Court of Appeal in that case found that there had not been fraudulent misrepresentation and decided for the defendants. However, the court considered what the position would have been had that not been the case, stating:
"I am not prepared to hold that, if a layman asks an expert dealer in some class of property to find a suitable investment for him on a commission basis and the expert, having been misled by fraudulent misrepresentations by the vendor, recommends a certain purchase and in reliance on the recommendation the layman purchases the property, the vendor can rely on the fact that the actual misrepresentations as such were not communicated to the purchaser but only the recommendation of the expert which had been induced by them."
The court went on to say:
"Assuming that the plaintiff was within the class of persons to whom the representations were originally made, she fell out of the class when [the property company] agreed to buy the property. The original representations were spent."
Glencore argued that this finding established a general proposition that where a representation is made by one contracting party to the other, which then relies on it in entering the contract, the representation cannot then be relied on by a third party because it is spent. This principle, Glencore argued, applied to the present case because Petex had contracted as principal with Glencore, which caused any representations made by Glencore inducing entry into the contracts to be spent.
The court held that Gross v Lewis Hillman established no such general proposition, describing Glencore's argument as "ingenious but misconceived".
The court noted that Gross v Lewis Hillman identified two situations where, had the representations been deemed fraudulent, the claimant would be likely to have been successful:
On the facts, the court considered that both of these situations applied here. First, Glencore had been aware that Petex was a commission agent and that whatever representation was made to it would be passed on to and relied on by its principal, Rafirom. Second, the representations by Glencore in the shipping documents were made not only to Petex, but were repeated to Rafirom and to its bank (acting as its agent). The communication to the bank and to Rafirom had been in the form of the commercial invoices and letters of indemnity and original documents, which had been presented to Rafirom's bank and checked by Rafirom. As a result, the court concluded that the suggestion that Glencore's fraudulent misrepresentations had been spent when first made to Petex was "not only commercially absurd, but factually incorrect".
The court also justified its conclusion on an alternative basis using general agency principles. The court referred to a passage in Chitty on Contracts (which was cited with approval in Brown v InnovatorOne Plc(4)) identifying three types of representee for which an actionable fraudulent misrepresentation could be made out:
In the court's view, Rafirom fell into each of the three categories of representee. In particular, in relation to the third category the court stated: "Rafirom was clearly in the class of persons to whom the representations in the shipping documents, commercial invoices and certificates of conformity were directed."
The court was also satisfied that the remaining ingredients of the tort of deceit had been shown and held that Petrom succeeded on its primary deceit claim. It was therefore unnecessary for the court to consider its secondary conspiracy claim.
It would plainly have been unjust had the court allowed Glencore to sidestep liability to Petrom for the fraud which had been committed, so in that sense the 'right' result was reached. The decision is also sound on legal principles: it is difficult to see how the proposed general proposition could coexist with the established principles of agency cited by the court.
The case also contains some interesting commentary on the relative weight placed by the court on witness evidence as compared to contemporaneous documentary evidence in cases involving events that took place a long time ago. In such a situation, the court forms the view that contemporaneous documents are a better guide to the true position than the recollection of witnesses. Even though a particular witness may be endeavouring to tell the truth, the evidence given will inevitably be a reconstruction and recollection only in a general sense.
The court also noted that in such cases, it was necessary to be cautious and not to assume too readily that the absence of documentary evidence meant that such a document never existed. The court gave an example of one transaction where it was known to Petex that a particular shipment was an unrecognised blend and where there was no document showing Petex communicating this fact to Raifrom. Rather than concluding that no such communication took place, the court concluded that it was likely that there had been such a document, but that it had simply been lost over time.
For further information on this topic please contact Geraldine Elliott or Chris Whitehouse at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(1) OMV Petrom SA v Glencore International AG  EWHC 666 (Comm).
(2)  Ch 445.
(3)  EWCA Civ 413.
(4)  EWHC 1321 (Comm).
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