The Court of Appeal has found that a “non-reliance” clause in a lease was a term that excluded or restricted liability for misrepresentation. The clause was therefore within the scope of s.3 of the Misrepresentation Act 1967 (“MA”) and subject to the reasonableness test under s.11(1) of the Unfair Contracts Terms Act 1977 (“UCTA”): First Tower Trustees Ltd v CDS (Superstores International) Limited [2018] EWCA Civ 1396.

Some key points from the Court of Appeal’s analysis include:

  • Where a clause simply delimits the parties’ primary obligations, it is not an exclusion clause and therefore the reasonableness test in UCTA will not apply. Such clauses define the basis on which the parties are contracting. Lewison LJ, who gave the leading judgment, suggested that this is how the label “basis clause” in some of the cases should be understood, though Leggatt LJ, who delivered a concurring judgment, suggested that the term is best avoided in the interests of clarity.
  • A non-reliance clause, in contrast, seeks to prevent liability arising in misrepresentation by stating that no representations have been made or, if made, have not been relied on, and therefore setting up a contractual estoppel. The Court of Appeal held that such a clause amounts to an attempt to exclude liability for misrepresentation. Accordingly, it is subject to s.3 MA and therefore the reasonableness test under s.11 UCTA.
  • Leggatt LJ commented (obiter) that it does not matter whether the non-reliance clause is contained in a contract entered into after the representation was made (as in this case) or before it (eg in a confidentiality agreement entered into before the main transaction). Where it is in a contract agreed before the representation, however, it might affect whether the elements of the misrepresentation claim are in fact established, eg whether a particular communication would reasonably be understood as making a representation or whether it was in fact relied on.

Background

The defendant/appellant landlords (the “Landlords”) entered into a lease of their commercial property to the claimant/respondent (“CDS”).

Before entering into the contract, CDS’s solicitors had raised enquiries on a Commercial Property Standard Enquiries Form. This form included a statement that the Landlords would notify CDS if, before exchanging contracts, they became aware of anything which may cause any of their replies to be incorrect.

One of the enquiries asked for details of any actual, alleged or potential environmental problems (including actual or suspected contamination) relating to the property. The Landlords’ solicitors responded that “The Seller has not been notified of any such breaches or environmental problems relating to the Property but the Buyer must satisfy itself”.

The Landlords’ agents were subsequently informed that there was asbestos on and near the property but the Landlords did not pass this information to CDS before the lease was entered into.

In fact, the premises were so contaminated with asbestos that they were dangerous to enter. CDS terminated the lease and brought a claim for misrepresentation under s.2 MA.

High Court decision

The High Court found that the Landlords’ representations in the reply to the Enquiry Form were false. The Landlords did not appeal against this conclusion.

The Landlords relied on Clause 5.8 of the lease, which stated:

“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 High Court held that clause 5.8 was an attempt to exclude liability for Misrepresentation within the scope of s.3 MA. This provides that any contractual term which would exclude or restrict liability for pre-contractual misrepresentation is subject to the reasonableness test in s.11(1) UCTA.

The High Court went on to hold that clause 5.8 did not satisfy the reasonableness test. CDS was awarded damages in the sum of £1.4m plus interest (First Tower Trustees & Anor v CDS (Superstores International) Ltd [2017] EWHC 891 (Ch)).

The Landlords appealed, including on the proper construction of clause 5.8.

Court of Appeal decision

The Court of Appeal held that clause 5.8 was subject to the UCTA reasonableness test, and that there was no basis for interfering with the High Court’s decision that it was unreasonable. It considered two key questions in relation to the question of whether the reasonableness test was engaged:

  1. Whether the clause, on its true construction, did nothing more than delimit the primary obligations of one of the contracting parties and so did not engage s.3 MA (and therefore s.11(1) UCTA); and
  2. If the clause did not simply define the primary obligations of the parties, whether the Landlords were entitled to rely on a contractual estoppel to shield the term from scrutiny under s.3 MA (and therefore s.11(1) UCTA).

Clauses describing primary obligations

The Court of Appeal (in Lewison LJ’s judgment) referred with approval to comments in JP Morgan Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm) that:

“There is a clear distinction between clauses which exclude liability and clauses which define the terms upon which the parties are conducting their business; in other words, clauses which prevent an obligation arising in the first place…Thus terms which simply define the basis upon which services will be rendered and confirm the basis upon which parties are transacting business are not subject to section 2 of UCTA…”.

The Court of Appeal stated it was in that sense that the label “basis clause” used in some of the cases was to be understood – restricted to clauses defining the parties’ primary obligations. That was not, however, the nature of the clause in this case.

The Court of Appeal distinguished the High Court’s decision in Thornbridge v Barclays Bank plc [2015] EWHC 3430 (QB), which was not in relation to a claim for misrepresentation. In Thornbridge, a bank customer claimed that the bank had breached its information and advisory duties in connection with the sale of a financial product. The court considered a clause which stated that the buyer was not relying on any communication “as investment advice or as a recommendation to enter into” the transaction. The court was therefore concerned with the primary obligations owed by the bank in relation to that sale.

Non-reliance clauses

In the present case, having found that clause 5.8 did not simply define the parties’ primary obligations, the court proceeded to consider the law on non-reliance clauses.

Parties to a contract can, unless there is a statute to the contrary, agree what they like – including that they will accept a particular state of affairs even if they know it to be untrue. This creates a contractual estoppel against asserting the contrary position.

However, there remains the question whether there is a “statute to the contrary” which means the parties are not entitled to agree what they like. The Court of Appeal held that s.3 MA is such a statute to the contrary. The policy behind s.3 MA was to prevent contracting parties from escaping from liability for misrepresentation, unless it is reasonable for them to do so.

The Court of Appeal cited a number of cases in which a non-reliance clause was said to engage s.3 MA, and noted that this was supported by obiter dicta in Springwell, which said that where a clause is “an attempt retrospectively to alter the character and effect of what has gone on before” it is “in substance an attempt to exclude or restrict liability”.

The Court of Appeal concluded that clause 5.8 was a contractual term which would have the effect of excluding liability for misrepresentation, and was consequently within the ambit of s.3 MA and subject to the UCTA test of reasonableness.