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COURT OF APPEAL STRIKES DOWN NON-RELIANCE CLAUSE BETWEEN COMMERCIAL PARTIES ADVISED BY SOLICITORS

The Court of Appeal has just handed down judgment in First Tower Trustees Limited & Intertrust Trustees Limited v CDS (Superstores International) Ltd [2018] EWCA Civ 1396, an important decision on the enforceability of non-reliance clauses.

Summary
The unanimous Court of Appeal (Lewison LJ, Leggatt LJ and Sir Colin Rimer) held that non-reliance clauses are subject to section 3 of the Misrepresentation Act 1967 (the 1967 Act).  

Such clauses are therefore only enforceable in so far as it was fair and reasonable to have included them in the contract.

As the Court noted, this area has recently been the subject of uncertainty and confusion.  This was due to several High Court decisions which had suggested that non-reliance clauses might escape review under section 3 of the 1967 Act. 

In disapproving those first instance decisions, the Court of Appeal brings clarity as to the correct legal test. Unfortunately, however, it does so at the expense of certainty for contracting parties who will now face arguments as to the reasonableness of such provisions.

The facts and judgment at first instance
The case arose from representations in response to pre-contract enquiries by a prospective commercial tenant.

The tenant sought details of any contamination at the rental property.

The landlords’ replies to enquiries stated that they had not been notified of any such problems but that the tenant must satisfy itself as to the same. 

The replies included an interpretation section in which the landlords confirmed that pending completion it would notify the tenant on becoming aware of anything which might cause any reply that it had given to be incorrect.

Shortly prior to completion, the landlords’ agent received reports indicating that there was asbestos on the property and that it was unsafe.  This was not conveyed to the tenant. 

Unsurprisingly, the judge found that there had been a misrepresentation.

The question then arose of whether the landlords could rely upon a non-reliance clause within the lease to exclude liability.

The clause provided “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 clause plainly covered the representation in question. 

The question then arose of whether the clause engaged section 3 of the 1967 Act. 

Section 3 provides that if a contract includes a term which excludes or restricts any liability or remedy for a misrepresentation made before a contract that term will be of no effect except in so far as it satisfies the requirement of reasonableness under section 11 of the Unfair Contract Terms Act 1977 (UCTA). 

Section 11 of UCTA provides that the term must have been a fair and reasonable one to have 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 landlords relied on a recent High Court decision for the proposition that a non-reliance clause was not caught by section 3 of the 1967 Act (Sears v Minco [2016] EWHC 433 (Ch)). 

In Sears the High Court had held that: (a) section 3 did not apply to a non-reliance clause because it was a form of contractual estoppel; (b) such a clause sets out the basis upon which the parties contract rather being an exclusion clause and is therefore immune from section 3; (c) as a result it was not necessary for the party relying upon such a clause to satisfy the requirement of reasonableness under UCTA.

At first instance in First Tower, the judge declined to follow Sears. He found that the non-reliance clause was subject to section 3 of the 1967 Act. 

The judge further held that the clause in question was unreasonable under UCTA.   If upheld the clause would have allowed the landlords (absent fraud) to say what they wanted in response to the replies to enquiries.  They would thus have been able to withhold their own knowledge of a serious problem and then meet any complaint with reference to the non-reliance clause.  The judge found that highly-unreasonable, particularly in the conveyancing world where (he noted) pre-contractual enquiries have a particular and well-recognised importance.   

The judge also held that the fact that the lease was negotiated by commercial represented by solicitors was insufficient to make it reasonable to include it.

Court of Appeal decision
The judgment at first instance was upheld by the unanimous Court of Appeal.

The Court noted that it was now firmly established at Court of Appeal level that parties to a contract can bind themselves at common law to accept a particular state of affairs even if they know that state of affairs to be untrue.   Such an agreement gives rise to a contractual estoppel which, unlike other estoppels, requires no proof of reliance. 

Thus parties can at common law bind themselves to a fictional state of affairs in which no representations have been made or, if made, have not been relied upon. 

The position at common law was, however, not the end of the enquiry.  The 1967 Act specifically intervened in relation to clauses which would otherwise be effective to exclude liability for misrepresentation. 

The Court rejected the suggestion that the sophistication of the parties might be relevant in determining whether a clause fell within section 3 of the 1967 Act.  A clause either fell within the section or it did not.  The sophistication of the parties is relevant to whether it was fair and reasonable to include the term but not whether the term fell within the section in the first place.

The Court suggested a simple test to determine whether section 3 of the 1967 Act was engaged:  Would liability arise for misrepresentation if the clause did not exist?  If so, but the clause (if effective) would prevent such liability then section 3 was engaged. 

In so finding, the Court disapproved Sears and rejected dicta in two other first instance decisions.

The Court also upheld the judge’s decision that the non-reliance clause was unenforceable.  In doing so it stated that, although on exceptional facts a court might uphold as reasonable a clause which excluded liability for representations in replies to enquiries, it was very hard to imagine what such facts might be.

Practical implications
Although this case arises in the landlord and tenant field, the points of principle arising are of general application.

Indeed, non-reliance clauses are now almost invariably included in all manner of commercial agreements.

So, for example, share and business sale agreements frequently include such clauses.  Disputes I handle in that field regularly involve allegations of misrepresentation arising from replies to pre-contract enquiries relating not just to property matters but also to accounts, customers, employees, tax, IP rights, litigation and so on. 

Given the importance of such documents to a share or business purchaser, where there are such formal pre-contract enquiries the Court may well be ready to strike down clauses which exclude all liability whatsoever.

In terms of drafting, the decision in First Tower suggests that in such agreements there should generally be a carve out in respect of such formal pre-contract enquiries.  Indeed, at first instance in First Tower, the Court upheld as reasonable a clause in a separate agreement between the parties which had excluded all liability save in respect of such pre-contract enquiries.  Of course, that was of little help in circumstances where the misrepresentations had been included in such enquiries.

As to other practical implications, First Tower emphasises the importance of the seller: (a) ensuring that any response to enquiries are accurate and updated if the facts change; (b) checking with agents immediately prior to completion where it would be reasonable to do so as the latter might be aware of such potential changes.  

It is important to note that, even in cases where there is not an interpretation section indicating that any change will be notified, the Courts readily find that representations continue up to completion such that they need to be corrected if they are no longer accurate by that stage.

Finally, this decision reinforces the fact that all clauses of a contract ought to be carefully considered and clients advised accordingly.  This includes clauses which might traditionally be viewed as boilerplate clauses.  In that regard, the decision in First Tower comes hot on the heels of last month’s Supreme Court’s decision in Rock Advertising [2018] UKSC 24 on another standard form clause (the no-oral variation clauses).  A case comment on that decision may be found here.  

The author of this summary, David Lascelles, is recommended as one of the UK’s leading barristers in commercial and company law by Chambers & Partners and Legal 500 independent guides to the Bar.

David regularly acts in share sale disputes including claims involving allegations of misrepresentation and breach of warranty.  He will be speaking at Littleton’s Commercial Seminar on 10 October 2018 on practical issues arising for solicitors when giving notice of breach of warranty claims under share sale agreements. If you would like to reserve your space at this seminar, please contact our Marketing Team.
Posted: 21.06.2018 at 09:57
Tags:  Comments  Commercial Law
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