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‘Non-reliance’ clause does not defeat ‘Replies to Enquiries’ liability

Business meeting with work on contract Print publication

02/08/2019

Will Cousins explains why a recent Court of Appeal case contains important lessons for all contracting parties looking to exclude or limit liability for pre-contractual statements/misrepresentation.

Risk of misrepresentations

Prior to any sale/purchase or letting of land, a multitude of enquiries, discussions and negotiations take place before any deal is done. Marketing campaigns for properties/developments, promotional offers and other communications with potential purchasers/tenants have often also been undertaken prior to the contemplation of any particular enquiries or leads. At this pre-contract stage, a myriad of representations are made, many of which could give rise to liability for misrepresentation [1]. There are certain steps, however, that can be taken to exclude or limit liability for misrepresentation.

Potential contractual protections

For example, it is possible to insert a clause into a contract or lease which seeks to exclude or limit liability for misrepresentation. Typically, best-practice is to include a ‘non-reliance’ statement: because reliance on a statement or representation as an inducement to enter into a contract is a necessary component of an actionable misrepresentation, where a party has signed up to a clause which states that it did not rely on any pre-contractual statements or representations, no misrepresentation claim can be made out. The recent case of First Tower Trustees Ltd & Anor v CDS (Superstores International) Ltd [2], however, confirms that such non-reliance clauses, if they are to defeat misrepresentation claims, 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/corporate due diligence.)

The prospective tenant had sought 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 [3] 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). That section 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’ in section 11 of the Unfair Contract Terms Act 1977 (UCTA) [4].

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 [5], nevertheless statute intervenes to provide an additional requirement 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 it would 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. It could not therefore be relied on to defeat the tenant’s misrepresentation claim. The court noted that if the clause was upheld, it would render the landlord’s replies to enquiries worthless. In view of the particular and widely recognised importance of replies to pre-contract enquiries, 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 and practical advice

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 three important practical points:

  • Contracting parties should review and take specialist 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 relevant factual circumstances;
  • In the case of pre-contract enquiries, absent exceptional circumstances, it is unlikely that non-reliance clauses will enable a seller/landlord to escape liability for misrepresentation;
  • 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. It must also 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. (Where sellers/landlords have agents acting, it may be prudent to check with them for any such changes immediately prior to completion.)

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[1] A misrepresentation is an untrue statement of fact or law upon which a party relies in being induced to enter a contract, which thereby causes the relying party to suffer loss. Misrepresentations can be express written or oral statements; they can be implied by words or by conduct; made when making plans or projections for the future; arise via half-truths; or arise where a statement was true when it was made, but later becomes untrue if circumstances change.
[2] [2018] EWCA Civ 1396.
[3] “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.”
[4] 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.
[5] 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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