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18 April 2019
The Court swept aside a significant body of cases which permitted banks to rely on contractual clauses to avoid liability for misrepresentation, and instead held that such clauses must first pass the test of reasonableness set out in s.3 of the Misrepresentation Act 1976 (the Act).
First Tower Trustees Limited (FTT) were landlords of commercial property. CDS (Superstores International) Ltd (CDS) was a potential tenant considering leasing properties from FTT.
In responding to enquiries before contract, FTT represented that the properties were not affected by asbestos. In truth, the properties were so contaminated that they were dangerous to enter.
CDS entered into a lease and agreement for lease (the Agreements) and soon after discovered the asbestos. CDS brought a claim against FTT for misrepresentation and succeeded at first instance.
The appeal raised a number of issues, but the principal question (and the focus of this article) was to what extent could FTT rely upon terms of the Agreements to limit or exclude their liability for misrepresentation?
There was no question that the representations made by FTT were false. However, FTT relied upon the following clauses of the Agreements (both of a similar effect):
Clause 5.8 of the lease 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.”
Clause 12 of the agreement for lease stated: “The Tenant acknowledge and agree [sic] that it has not entered into this Agreement in reliance on any statement or representation made by or on behalf of the Landlord other than those made in writing by the Landlord’s solicitors in response to the Tenant’s solicitors’ written enquiries.”
CDS contended that those clauses were only valid if they passed the reasonableness test mandated by s.3 of the Act, which provides in relevant part:
“If a contract contains a term which would exclude or restrict—
(a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or
(b) any remedy available to another party to the contract by reason of such a misrepresentation,
that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does.”
However, that position ran headlong into established case law that a clause of a contract which does no more than “delimit the primary obligations of one of the contracting parties” (a so-called “basis clause”) is not an exclusion clause to which s.3 of the Act applies. Moreover parties can in any event contractually agree a state of affairs (such as that no representations having been made) which they cannot later resile from.
This principle was applied in a number of financial litigation cases since the financial crisis, including JP Morgan Bank v Springwell Navigation Corp  EWHC 1186 (Comm) and Springwell Navigation Corp v JP Morgan Chase Bank  EWCA Civ 1221. FTT argued it should also apply in this case.
The Court rejected FTT’s argument with Lewison and Leggatt LLJ delivering reasoned judgments.
Lewison LJ observed that on their face, these clauses clearly appeared to exclude liability for misrepresentation which would otherwise arise. However, equally, such clauses can of course in fact be basis clauses.
The question, of course, was to how distinguish between those classes of clause. Lewison LJ noted that the label “basis clause” “means no more than that the clauses in question are defining the parties’ primary obligations”, whereas on the other hand, “the terms of the contract might qualify a representation that might otherwise have been made”.
Next, Lewison LJ recognised that “parties can bind themselves by contract to accept a particular state of affairs even if they know that state of affairs to be untrue”. Nevertheless, whether s.3 of the Act applied “is a question, not of the interpretation of the contract, but of the interpretation of the statute. The fact that clause 5.8 of the lease operates as a contractual estoppel does not prevent consideration of this question; not least because section 3 is expressly directed at contract terms.”
Accordingly, Lewison LJ distinguished between the effect of the statute and the effect of the contract. The policy of s.3 of the Act is to “prevent contracting parties from escaping from liability for misrepresentation unless it is reasonable for them to do so” and “[h]ow they seek to avoid that liability is subsidiary”. In other words, Lewison LJ directed the attention of the enquiry back to the substantial effect of the clause in question – if the effect of the clause (whether analysed as a basis clause or a question of estoppel) is to exclude liability for misrepresentation, s.3 of the Act applies.
In this case, Lewison LJ said that “a clause which simply states…”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” is a contract term which would have the effect of excluding liability for misrepresentation; and consequently is subject to the test of reasonableness.”
Leggatt LJ agreed with the reasoning, but went further and gave a helpful guideline as to which clauses are apt to fall within the ambit of s.3 of the Act and which are not. In particular, a clause which “retrospectively prevents a party from asserting that a representation has been made or relied on is an attempt to exclude or restrict liability”. He also noted that this conclusion cannot turn upon the identity of the contractual counterparty – identical words in a contract cannot have a different meaning depending upon the sophistication of one of the parties.
However, in financial cases, the decision is not a panacea for all investors seeking redress for misrepresentation. The Court’s decision only subjects clauses which state that no representations have been made to a test of reasonableness. Although the sophistication of the claimant will not affect whether that test should be applied, both Leggatt LJ and Lewison LJ held that it will be relevant to determining whether the relevant clause is reasonable.
The decision will therefore be of most relevance to SMEs and other unsophisticated investors who were asked to sign “basis clauses” after having received representations from their bankers. The Court of Appeal’s decision suggests that such clauses are no longer as reliable as they once were.
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