It is common practice for a seller of property to attempt to limit his liability for misrepresentation as much as possible. Unfortunately for the seller, his ability to do so is firmly restricted by Section 3 of the Misrepresentation Act 1967, which states that any contract term that attempts to exclude or restrict liability for, and/or remedies available in the case of, misrepresentation, is “of no effect” unless it can be shown that the term is “fair and reasonable” in the circumstances.
Condition 7.1.3 of the Standard Conditions of Sale (4th Edition) attempts to provide a standard limitation of the seller’s liability for misrepresentation. In contracts where this clause is incorporated, liability is limited to situations where there has been recklessness or fraud on the seller’s part, or where there is a substantial difference in the quantity, quality or tenure of the property from what the buyer has been led to believe.
The clause has been in use for many years, and has been adapted on numerous occasions in response to judicial criticism. It could be assumed, therefore, that the clause is now completely “fair and reasonable”. However, the recent case of Cleaver & Others v. Schyde Investments Ltd16 casts doubt on its reasonableness in every circumstance.
Background to the case
Cleaver agreed to sell a plot of land to Schyde, on the understanding that Schyde wanted to develop the property for residential use. As part of the pre-contract enquiries, Cleaver told Schyde’s solicitors that there were no planning applications, letters or notices outstanding against the property.
In the meantime, another potential purchaser applied for permission to build a medical centre plus four flats on the site. Cleaver was notified of the application and passed the information on to its solicitors, but the answers to Schyde’s enquiries were not updated and the sale proceeded to exchange of contracts (which incorporated, amongst other things, Condition 7.1.3) without Schyde being informed of the planning application.
When Schyde became aware of the planning application it gave notice to rescind the contract on the basis that Cleaver had innocently misrepresented the position by failing to update their responses to Schyde’s enquiries. Cleaver resisted, relying on Clause 7.1.3 for protection. At first instance, the judge found in favour of Schyde, saying that clause 7.1.3 was not a “fair or reasonable” contract term in these circumstances, and was therefore “of no effect” according to the Misrepresentation Act 1967.
Cleaver appealed on the grounds that both parties were legally represented and had agreed to use the standard terms, that the parties had themselves varied other standard terms to suit the agreement and had by implication agreed that Clause 7.1.3 was suitable for the agreement, and that therefore it was “fair and reasonable” to rely on Clause 7.1.3. Cleaver’s argument also encompassed the fact that the clause had been in use for a long time and had been endorsed by the Law Society.
On appeal it was decided that, although it would require some “exceptional feature” to persuade the court that a standard term of such long standing and common use was unfair in the circumstances, in this case the judge at first instance was entitled to conclude that Cleaver had not shown the clause to be reasonable because:
- had Schyde known of the planning application prior to entering into the contract, it would not have proceeded with the purchase;
- Cleaver knew of the planning application at the time of exchange, and that it would be material to Schyde’s plans;
- Cleaver had expressly promised to update their answers to enquiries if they became aware of any material facts that would alter those answers, and they had not done so.
The Court of Appeal dismissed Cleaver’s appeal and permitted Schyde to rescind the contract.
It is clear that there was some reluctance in the Court of Appeal in agreeing with the decision of the first instance judge. Lord Justice Etherington, giving the leading judgment, was “far from certain that I would reach the same conclusion”, while Lord Justice Longmore added that the clause “is, in general, a reasonable clause”. However, this case demonstrates that the reasonableness of Standard Condition 7.1.3 is not always beyond question, and that sellers will need to be on their guard and ensure that information given to the buyer remains up to date if they wish to rely on the clause to avoid liability for innocent misrepresentation.