UK: The Reasonableness Of Non-Reliance Clauses

Last Updated: 14 September 2018
Article by Emma Broad and Thomas Kiernan
Most Read Contributor in UK, August 2018

The Court of Appeal has confirmed that a non-reliance clause in a commercial  lease had no effect as it was not reasonable and therefore fell foul of the Misrepresentation Act 1967. The decision in First Tower Trustees Ltd v. CDS (Superstores International) Limited [2018] EWCA Civ 1396 will be of wide interest given the prevalence of such clauses in both leases and sale agreements.

Background

In 2015 the landlord (First Tower Trustees Ltd) let warehouse premises in Barnsley to the tenant, CDS (Superstores International) Limited.

Shortly thereafter, the tenant discovered that the premises contained unsafe levels of asbestos and could not be occupied. This came as a surprise to the tenant as the landlord had confirmed in its pre-contract replies to enquiries that it was not aware of any notices or environmental problems at the property, albeit the tenant should satisfy itself (the reply to enquiry). It transpired that the landlord had in fact been notified of the contamination two weeks prior to completion but had not passed this information on to the tenant, nor modified its reply to enquiry.

The tenant sued the landlord for misrepresentation. The landlord defended the claim on the basis of a clause in the lease which stated that the lease had "not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the landlord" (clause 5.8).

The judge at first instance held that the reply to enquiry amounted to a misrepresentation and that clause 5.8 amounted to an attempt to exclude liability for misrepresentation within section 3(1) of the Misrepresentation Act 1967 (section 3). Pursuant to that statutory provision, clause 5.8 would only be of effect if it satisfied the test of reasonableness under section 11(1) of the Unfair Contract Terms Act 19771. On the facts the judge held that clause 5.8 was unreasonable and held the landlord liable for misrepresentation. The landlord appealed.

Decision

The key issue before the Court of Appeal was whether or not clause 5.8 fell within the ambit of section 3. The issue was complicated by the fact that case law has established 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 – so here, the untrue state of affairs that the tenant had not relied upon replies to enquiries by the landlord.

To determine the issue the court felt a distinction needed to be made between:

  • terms that simply delineate the extent of the primary obligations of the contracting parties (often referred to as "basis clauses"). For example, if a decorator agrees to paint the outside woodwork of a house except the garage doors, that clause is designed to define the scope of the agreement between the parties rather than trying to exclude liability for breach. Such clauses do not fall within the ambit of section 3; and
  • terms that seek to exclude liability which do fall within the ambit of section 3.

The court held that clause 5.8 amounted to an attempt to exclude liability for misrepresentation as it was clear the landlord would have been liable for misrepresentation but for clause 5.8. It therefore needed to satisfy the test of reasonableness as required by section 3.

The court held that on the facts clause 5.8 was unreasonable. Key to this part of the decision was the fact that clause 5.8 did not allow the tenant to rely upon pre-contract replies to enquiries. The court stressed the importance of pre-contract enquiries in the field of conveyancing and noted that the effect of clause 5.8 was to render the pre-contract replies to enquiries worthless.

Commentary

The Court of Appeal's message is clear – non-reliance clauses are not beyond the scrutiny of the reasonableness test prescribed by section 3. If a clause falls foul of that test it will be of no effect and will offer no defence against a claim for misrepresentation.

In particular this decision serves as a warning that inserting a non-reliance clause into a property agreement which does not even allow the contracting party to rely on pre-contract enquiries is at a high risk of being found to be unreasonable under section 3. While an exclusion clause that does allow the contracting party to rely upon a solicitor's written replies to written enquiries from the counterparty's solicitor is less likely to fall foul of this statutory provision there is still no guarantee that it will not – it will turn on the circumstances of the case.

Clearly the best defence for sellers and landlords is to be extremely careful when drafting their replies to enquiries in the first place and to ensure that they update their replies if further information comes to light that might render a reply given inaccurate or misleading.

Footnote

1 Note that this only applies to non-consumer contracts. Consumer contracts will be governed by the Consumer Rights Act 2015.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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