Court of Appeal decides that non-reliance clauses are all effectively subject to UCTA and must be shown to be reasonable28 June 2018
For some time it has been customary to insert into the boilerplate both an entire agreement clause and a clause stating that the customer acknowledges that it has not relied on any pre-contractual representation made by the provider (a “non-reliance clause”). It was thought that these clauses, especially a non-reliance clause, would effectively mean that the customer could have no claim in misrepresentation and would have to rely on proving a breach of contract (if any). The recent decision of the Court of Appeal in First Tower Trustees v CDS Superstores International  EWCA Civ 1396 changes that settled view of the law completely and threatens to shake up practice in this area.
One other legal principle it is necessary to know is that, once a representation has been made, it continues to operate. The consequence is that, if you have made a representation believing it to be absolutely correct, as soon as you find out that it is in fact incorrect, you have to correct the representation you have already given. If you do not, you could find yourself receiving a claim for misrepresentation because you failed to correct the earlier representation. Good intentions have nothing to do with it – if you find out something you have said is in fact wrong, you have to correct what you have said. If you don’t, you have committed a misrepresentation.
Then the eye turns to the contract to see what it says about your potential liability for that misrepresentation. Does a non-reliance clause get you off the hook?
First Tower Trustees (FTT) owned commercial premises including four bays (part of warehousing facilities) and ultimately on 30 April 2015 entered into four arrangements with CDS: three leases and one agreement for a lease, each in respect on one specific bay.
Prior to that, as is normal with conveyancing practice, CDS’ solicitors raised a variety of formal, written inquiries with FTT’s solicitors. The response was, as so often, not particularly revealing, the general rubric stating that “… the Buyer should still inspect the Property, have the Property surveyed, investigate title and make all appropriate searches and enquiries of third parties”.
In response to a specific enquiry about the presence of hazardous substances (including asbestos), FTT’s solicitors simply said, “The Buyer must satisfy itself”; in response to an inquiry about documentation to do with environmental problems, FTT’s solicitors replied, “The Seller is not aware of any such notices etc but the Buyer must satisfy itself” and in response to an inquiry about actual or suspected contamination, FTT’s solicitors replied, “The Seller has not been notified of any such breaches or environmental problems relating to the Property but the Buyer must satisfy itself”. All pretty cautious, non-committal stuff.
However, FTT forwarded a report demonstrating the absence of asbestos but, for some unexplained reason, this was not even a report about the same property. Then in early April FTT’s agents received a report showing the presence of asbestos, which was confirmed in a specialist report some days later. No-one said anything to CDS about this discovery and the parties entered into the leases and the agreement for a lease a week or so later. Asbestos was indeed discovered and CDS claimed damages for misrepresentation against FTT.
The clauses in dispute
The leases provided at clause 5.8:
“5.8 The tenant acknowledges that this lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the landlord.“
The agreement for a lease provided at clause 12.1:
“12.1 The Tenant acknowledge and agree [sic] that it has not entered into this Agreement in reliance on any statement or representation made by or on behalf of the Landlord other than those made in writing by the Landlord’s solicitors in response to the Tenant’s solicitors’ written enquiries.
12.2 Nothing in this Agreement shall be read or construed as excluding any liability or remedy resulting from fraudulent misrepresentation.“
One crucial distinction between these two provisions is this: clause 12.1 gives a special status for any written replies given in response to CDS’ solicitors’ written enquiries. This recognised the normal practice of conveyancing: prior to exchange of contracts, there is normally a stage when formal inquiries are raised and formal replies are given. It is expected as part of conveyancing practice that the purchaser is entitled to rely on any specific information provided by way of formal reply to a formal inquiry.
If you think about it, this is also true of many other contracts which go through some sort of tendering process, such as those in the world of IT, construction or international engineering projects, among many others.
More legal background – the statutory provisions
In a long and legally complex decision, the Court of Appeal considered these two clauses against the statutes applicable to misrepresentation claims, namely, the Misrepresentation Act 1967 (MA) and the Unfair Contract Terms Act 1977 (UCTA). It is necessary to look at them now.
Section 2(1) of the MA provides
“Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true.”
This is an odd provision which has vexed lawyers ever since and there are a couple of points to note:
- “would be liable to damages in respect thereof had the misrepresentation been made fraudulently”: this is truly bizarre drafting and has become known as the “fiction of fraud”. Why? Because before the MA, you could only recover damages for a fraudulent misrepresentation – not an innocent one. That is why the MA proceeds on this rather curious basis of a “fiction of fraud” – it asks us to pretend that there has been a fraud (there hasn’t been) but it asks us to assume that there has been, so that the claimant can claim damages. Strange, but true.
- “unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true”: the section immediately provides a defence for the innocent misrepresentor – if the misrepresentor can show (reasonable) innocence, the misreprentor is not liable under this provision.
Of course, FTT could NOT come within the defence of section 2(1) – FTT’s agents received a report showing the presence of asbestos contamination between the time of the replies to inquiries and the contract. FTT therefore had to rely on the contractual non-reliance provisions.
The next statutory provision we need to consider is section 3 of the MA, which provides,
“If a contract contains a term which would exclude or restrict—
(a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or
(b) any remedy available to another party to the contract by reason of such a misrepresentation,
that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does.”
In other words, if you make any attempt in your contract to get out of your liability for misrepresentation, you have to be able to show that it is reasonable to do so – the test of reasonableness is set out in section 11 of UCTA. To complete this rather lengthy background, section 11 states,
“In relation to a contract term, the requirement of reasonableness for the purposes of … section 3 of the Misrepresentation Act 1967 … is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.”
The decisive question is this: is a non-reliance clause an attempt at excluding or restricting your liability for misrepresentation, or could it be portrayed instead as simply a clause setting out the limits of what you were contracting to do (or deliver)?
What the Court of Appeal thought
There have been many cases looking at this problem, many in the financial services sector. This case of course considered the property sector. However, looking at industry sectors more broadly, many projects consist of a pre-contractual stage when the parties are discussing the terms on which they will do business, many things are said, many questions asked and some answered – some incorrectly. In the financial services sector, cases have frequently revolved around a sale of an investment which has performed badly: the claimant loses money and sues the bank claiming that the bank failed to give advice as to the risks and suitability of that investment. The bank in its defence points to a term of the contract saying that it is not responsible for giving advice and that the customer should seek his own independent professional advice. For that reason, such clauses have become known as “basis clauses”, although the Court of Appeal in the case under discussion deprecated the use of this term.
The Court of Appeal considered a good deal of the case-law in this area. They acknowledged that putting in a non-reliance clause creates a “contractual estoppel” – in other words, if you sign a contract saying you have not relied on any representations, then you are “estopped” (as the law would put it) from going back on that statement.
However, after considering the authorities in this area, the Court of Appeal thought that such a contractual estoppel would not stop the statutory provisions quoted above from following their ordinary course. The policy behind the statutes was crystal clear, or so the Court of Appeal thought. That policy is set out in section 3 of the MA, and the consequence is that, if you make any attempt to exclude or restrict your liability for any pre-contractual misrepresentation you have made, then you must be able to show that such an exclusion is reasonable under section 11 of UCTA.
The Court of Appeal did not vouchsafe a simple test for determining when a non-reliance clause would be reasonable. In the context of a property transaction, where it is customary to have a procedure of written enquiries and formal replies, it was not reasonable to include a non-reliance clause which left no room for allowing the purchaser to rely on formal replies to inquiries. This meant that clause 12.1 of the agreement for a lease was reasonable, whereas clause 5.8 of the leases was not. Lewison LJ tantalisingly said that the decision in this case should not cause consternation as it “will always be open to a contracting party seeking to rely on such a clause to establish that it was reasonable; and in cases involving the sale of complex financial products to sophisticated investors it may well be“. So he at least was envisaging that in the financial services sector, where many of these cases have arisen, the position is not about to change.
But what about where you have a sale of a financial product to someone who is not a “sophisticated investor”? It looks like the situation could be very different. Go back to the examples mentioned earlier where the pre-contractual stage customarily involves a lengthy process of question and answer (IT, construction or international engineering): it looks like now the situation has got a lot harder and anyone trying to exclude or limit their liability for misrepresentation is going to have a hard job proving that such exclusion or limitation was a reasonable one.
The Court of Appeal stressed that it was looking at the substance of the provision rather than its exact wording. As Leggatt LJ put it, no “rational legislator could have intended that the need for a contract term to satisfy a test of reasonableness could be avoided simply by felicity in drafting the contract term“. In other words, it is not a question of tinkering with you non-reliance clause and coming up with some clever wording which gets around this decision.
The real point coming out of this decision is that entire agreement and non-reliance clauses are no longer boilerplate. Section 11 of UCTA directs us to have regard to “to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”. In other words, you can’t just slip in a non-reliance clause (and most commercial contract precedents have one) and sit back thinking the position is secured: you have to go further and consider the circumstances operative at the time when each individual contract is made. You might like to set out what those circumstances are agreed to be – either in the recitals or in the non-reliance provision itself – so that the court is looking at agreed facts when it comes to the time to assess reasonableness.
The other point is that “basis clauses” (I am using that term although the Court of Appeal deprecated its use) might still have some use. If you set out the circumstances indicating reasonableness and also state the “basis”, the precise scope of the contract, you think you are entering into – it all goes to help make that non-reliance clause look more reasonable in context.
As I always say, I do not like to make contracts longer, but this decision means that much more care is required when drafting contracts with non-reliance clauses or entire agreement clauses which have the effect of excluding liability for misrepresentation. We need to wait to see how the drafting community reacts, and how courts apply the test of reasonableness in future cases. My prediction is that more scratch-drafting is going to be necessary – thereby increasing the transactional cost and lengthening negotiations beyond what is already a demanding process.
I am a lawyer and I like caveats: this is a general update only on a legal development and nothing here should be used as advice for any specific situation you may have. Always take professional advice before proceeding – consider this the “basis clause” for this update.