Entire Agreement clauses - enforceability
First Tower Trustees v CDS Superstores (Court of Appeal) [2018]
Entire Agreement clauses are under attack from two different directions. The Al-Hasawi case focussed on the drafting but even if you get the drafting right there is still a risk that the clause will be held to be unreasonable and therefore unenforceable. This was the focus of this second case .
Facts:
The parties entered into a commercial lease of property in Barnsley, South Yorkshire. As usual, the grant of the lease had been preceded by a series of pre-contract enquiries. One of these enquiries concerned the existence on the property of any hazardous substance including asbestos. The solicitors acting for the landlord replied to the questions with the typical "The [tenant] must satisfy itself" and “The [landlord] is not aware of any such notices etc. [relating to the presence of hazardous substances] but the [tenant] must satisfy itself”.
After answering the enquiries but before completion of the Lease the landlord’s agent became aware of a report related to some neighbouring properties which suggested that there may be some asbestos at the property. However, this information was not passed on to the prospective tenant.
The non-reliance clause in the lease stated that "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 original decision in the High Court found that there had been a misrepresentation and that finding was not appealed.
The substantive ground of appeal was that the trial judge had been wrong to conclude that a non-reliance statement was an exclusion of liability within the ambit of section 3 of the Misrepresentation Act 1967 (the ‘1967 Act’), and was therefore subject to the Unfair Contract Terms Act 1977 reasonableness test. Section 3 (1) provides:
"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 UCTA; and it is for those claiming that the term satisfies that requirement to show that it does."
Decision:
The Court of Appeal unanimously upheld the High Court's decision. The non-reliance statement had the effect of excluding liability for misrepresentation but was ineffective because it failed the test of reasonableness under UCTA.
Absent the non-reliance statement, the landlord would have been liable for misrepresentation.
While the court considered that there was some force to the landlord's arguments that the non-reliance statement was subject to negotiation and that the parties were both legally represented, it was particularly relevant in this case that the non-reliance statement precluded reliance on pre-contract enquiries, given their importance in the field of conveyancing.
According to the leading judge “To say that a simple non-reliance clause is immune from scrutiny under section 3 and section 11 is wrong”. He went on to say “Although there might be a case where, on exceptional facts, a clause which precludes reliance on replies to enquiries before contract might be held to satisfy the test of reasonableness even where those replies have in fact been relied on, I find it very hard to imagine what those facts might be”.
The judge did highlight a distinction between clauses which exclude liability (for pre-contract representations) and clauses which simply define the terms (so called ‘basis clauses’) upon which the parties are conducting their business; in other words, clauses which prevent an obligation from arising in the first place. Clauses which simply set the scope of any engagement or appointment would be less likely to be treated as an exclusion of liability and therefore not subject to the UCTA test.
Points to Note:
- The decision is one involving the common practice in commercial property transactions and so there is always a risk that the decision is peculiar to that particular sector. However, it would not in our view be safe to make that assumption. In many other instances, the execution of a commercial contract has been preceded by an extensive procurement or negotiation process where important representations have been made.
- The effect of this judgement is that the protection afforded by entire agreement clauses, even those containing a declaration of non-reliance, may be extremely limited. It therefore becomes critical for businesses to focus closely on what pre-contract representations are made and to ensure that they are accurate and not exaggerated.
- No doubt attempts will continue to be made to craft equivalent provisions which aim to limit primary obligations (and therefore have the same effect as the more traditional entire agreement clauses). If a provision can be crafted in this way it will escape the scrutiny of s3 but, as the judge pointed out “any clause which seeks to retrospectively alter the character and effect of what has gone before is in substance an attempt to exclude or restrict liability”. It may therefore be very difficult if not impossible to evade judicial scrutiny simply by employing clever wording.