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‘Non-reliance’ clause found not reliable to defeat misrepresentation claim

Empty vintage court's room with table, chairs and microphones. Print publication

11/07/2018


In our article ‘An entirely surprising interpretation of an entire agreement clause’, Gwendoline Davies explains the risks associated with pre-contractual [mis]representations and the various strategies that contracting parties can adopt to exclude or limit liability for misrepresentation.  One of our best-practice tips is to include ‘non-reliance’ clauses: reliance on a statement or representation as an inducement to enter into a contract is a necessary component of an actionable misrepresentation and so, if a party has signed up to a clause which states that it did not rely on any pre-contractual statements or representations, then it is prevented from pursuing a misrepresentation claim.  That advice is absolutely correct.  The recent case of First Tower Trustees Ltd & Anor v CDS (Superstores International) Ltd [1], however, confirms that if non-reliance clauses are to be reliable to defeat misrepresentation claims, they must also pass the requisite ‘reasonableness test’.

Case and context

The case concerned representations made by a landlord in response to a prospective tenant’s pre-contract enquiries. Although the case arose in a real estate context, it is applicable to all commercial contracts.  Pre-contractual statements are made in a huge variety of circumstances when parties consider doing business together, including: initial discussions; negotiation of terms; publication of marketing material; pre-contract enquiries/corporate due diligence; and so on. At the pre-contract stage in any context, myriad representations are made, many of which could give rise to liability.

The tenant had asked for details of any contamination at the premises. The landlord replied that it had not been notified of any problems.  When, shortly prior to completion of the lease, the landlord learned that there was asbestos on site, that was not communicated to the tenant.

The replies to enquiries contained a provision that, pending completion, the landlord would notify the tenant if/when it became aware of anything that would render any of its replies incorrect. Even if that provision had not existed, the common law provides that representations continue up to completion, such that they need to be corrected if/when things change.

There was no dispute, therefore, that there had been a misrepresentation. The question for the Court of Appeal was whether the landlord could rely on its non-reliance clause [2] to avoid liability.

Court of Appeal decision and guidance

To date there has been some uncertainty as to whether or not non-reliance clauses are caught by section 3 of the Misrepresentation Act 1967 (the MA) which provides that, if a contract includes a term which excludes or limits any liability for misrepresentation, that term will be unenforceable unless it satisfies the ‘reasonableness test’ under section 11 of the Unfair Contract Terms Act 1977 (UCTA) [3].

In this case the Court of Appeal confirmed that, although it is settled law that parties can bind themselves contractually to a state of affairs which they know to be untrue [4], nevertheless statute intervenes to provide an additional protection in relation to exclusion/limitation of liability clauses.  The Court of Appeal held that, quite simply, if liability for misrepresentation would arise if the clause did not exist (as indeed it would have in this case), then section 3 MA is engaged and the clause must satisfy the reasonableness test.

The Court of Appeal went on to determine that the landlord’s non-reliance clause was not reasonable and could not therefore be relied on to defeat the tenant’s misrepresentation claim. The court noted that if the clause was upheld, it could render the landlord’s replies to enquiries worthless.  In view of the particular and widely recognised importance of replies to pre-contract enquiries (whether in relation to real estate or wider corporate/commercial due diligence), the court considered that it would be exceptional for such a clause to be found reasonable in that context.

In addition, and importantly, although the Court of Appeal recognised that the courts should generally be wary of finding that terms negotiated between legally-represented and sophisticated commercial parties are unreasonable, the fact that the term had been so negotiated here was not sufficient to make it reasonable.

WM Comment

Whilst the First Tower case is to be welcomed for the clarity it brings to this area of law, it may call into question the reasonableness, and therefore the reliability, of some non-reliance clauses.  The case highlights two important practical points:

  • contracting parties should review and take specialist legal advice upon the terms of their commercial contracts – including the ‘boilerplate’ (which is often where non-reliance, entire agreement and other limitation/exclusion of liability clauses may be found) – to ensure that they are legally reasonable and enforceable in light of the relevant factual circumstances
  • regardless of the existence of a non-reliance clause, where a party responds to pre-contract enquiries/due diligence requests, it must do so accurately and it must ensure that its responses are updated and notified to its counterparty if/when any changes render the initial response[s] no longer correct prior to completion

If you would like any advice or assistance in connection with the drafting or review of any commercial contract terms, in relation to misrepresentation or any other potential liability or claim, please contact Lynsey Oakdene or any member of Walker Morris’ Commercial Dispute Resolution Team.

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[1] [2018] EWCA Civ 1396
[2] “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.”
[3] Section 11 UCTA provides that the term must have been a fair and reasonable one to include having regard to the circumstances which were, or ought reasonably to have been, known or in the contemplation of the parties at the time the contract was made
[4] That is, they can state in a contract that they did not rely on pre-contractual representations when deciding whether to enter the contract, thereby agreeing to be bound in law/contract by that statement, even if, in fact, they did rely on such representations

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