Some welcome commercial certainty
Parties who agree the basis on which they contract are bound by their agreement, the Court of Appeal has found. Put so simply, it hardly sounds like a surprising decision. Contracts are meant to be legally binding after all. However, until the judgment on 1 November 2010 in Springwell Navigation Corporation v. JP Morgan Chase Bank and others1 the ability of parties to agree whether they had given or received advice, and whether they had made or relied on a representation before they made their contract, was in doubt.
Conflicting cases resolved
Springwell resolves a clash between competing Court of Appeal authorities. Lowe v. Lombank2 suggested that an agreement about the basis of the contract that both sides knew was untrue was not a contractual promise at all. In contrast, the more recent case of Peekay Intermark Ltd v. Australia and New Zealand Banking Group Ltd3 held that, where parties had agreed to contract on a particular basis, they could not say afterwards that the reality had been different. This has become known as "contractual estoppel". In Springwell the Court of Appeal has consigned Lowe v. Lombank to a line of consumer case law that has minimal relevance to business disputes. Contractual estoppel is here to stay. This is welcome news not only for banks involved in complex derivative transactions, but also for the wider commercial world.
In addition, the court has clarified how to distinguish clauses that define the basis on which a party is willing to contract from clauses that exclude liability for negligence or misrepresentation. Exclusion clauses only work to the extent that they are "reasonable" under the Misrepresentation Act 1967 and the Unfair Contract Terms Act 1977.
The court's thinking
There have been a string of first instance decisions since Peekay that have followed it. Earlier this year, the Titan Steel Wheels4 case looked at duties to advise, while Raiffeisen Zentralbank v. RBS5 considered liability for representations. None of the cases has followed Lowe v. Lombank. But Springwell was the first time that the Court of Appeal had to decide which of its previous decisions was right. Lord Justice Aikens gave the judgment of the court. Before his promotion to the Court of Appeal, as Aikens J, he had been one of the first judges to follow Peekay6.
Springwell claimed its bankers, the Chase Manhattan group (now JP MorganChase), had misrepresented the nature of various investments that Springwell was induced to make in Russian debt securities known as GKO-Linked Notes. The defendant denied there had been any misrepresentations at all, and pointed out in addition that the terms of the contracts between the parties meant that Springwell could not rely on any actionable representation that Chase might have made.
The court began from first principles: parties to contracts are, unless some rule of law provides otherwise, entitled to agree what they like. Apart from the remarks of Diplock J in Lowe v Lombank, counsel for Springwell was unable to identify "any case that might support the proposition that parties cannot agree that X is the case even if both know that is not so". There was commercial utility in these clauses being enforceable, so parties know precisely the basis on which they are contracting.
Aikens LJ then considered what Lowe v. Lombank had actually decided. The claimant had bought a car on hire purchase. The agreement said the only warranties were those implied by the Hire Purchase Act 1938 as to fitness for purpose and merchantability. It also said that the hirer had examined the goods and that they were of merchantable quality, that she had not made known the purpose for which the goods were required and that they were fit for that purpose. The claimant did not read the contract and its terms were not explained to her. Indeed, she had not even seen the car. The salesman told her it was "perfect". In fact, the car was not roadworthy.
In his judgment, Diplock J said:
"To call it an agreement as well as an acknowledgement by the [claimant] cannot convert a statement as to past facts, known by both parties to be untrue, into a contractual obligation, which is essentially a promise ... that acts will be done in the future or that facts exist at the date of the promise ... To say that the hirer "agrees" that he has not done something in the past means no more than that the hirer ... represents that he has not done that thing in the past. If intended by the hirer to be acted upon by the person to whom the representation is made, believed to be true by such person and acted upon by such person to his detriment, it can give rise to an estoppel: it cannot give rise to any positive contractual obligations".
Aikens LJ held that this part of the decision in Lowe v. Lombank was about whether the claimant was bound by her acknowledgement that she had not indicated the purpose for which she wished to use the car. In reality, of course, the purpose was obvious: she wanted it for "driving about" as the defendant well knew. The important part of the court's decision – the part which was necessary to its reasoning, and thus binding – was that the acknowledgements were attempts to contract out of the warranties implied by the Hire Purchase Act 1938. Because the defendant had not explained the terms' effect, the attempts failed under section 8(3) of the Act. Therefore, Diplock J's finding above was not binding.
That left Aikens LJ to consider Peekay. He found it was good law: Springwell was indeed contractually estopped from contending that there were actionable representations by Chase. However, this conclusion was subject to the effect of section 3 of the Misrepresentation Act 1967 and the Unfair Contract Terms Act 1977. So, if the clauses relied on by Chase were exclusion clauses, they would have to satisfy the "reasonableness" test.
Exclusion clauses
At first instance, Gloster J had held that only a tiny number of the terms of the contracts were exclusion clauses subject to the reasonableness test. This was because most of them defined the basis on which Chase was willing to contract, rather than seeking to exclude liability.
Aikens LJ agreed about most of the clauses, but not all. He approved of the approach to deciding whether a clause is an exclusion of liability taken by Christopher Clarke J in the Raiffeisen Zentralbank case. He quoted Clarke J's "trenchant" description of the test:
"... to tell the man in the street that the car you are selling him is perfect and then agree that the basis of your contract is that no representations have been made or relied on, may be nothing more than an attempt retrospectively to alter the character and effect of what has gone before and in substance be an attempt to exclude or restrict liability."
So, clauses that try "retrospectively to alter the character and effect of what has gone before" will be exclusion clauses. Adopting that test, Aikens LJ added a small number of clauses to the list of exclusion clauses identified by the judge. As the clauses were reasonable, and thus enforceable, Springwell lost on this part of its case too.
Footnotes
1 [2010] EWCA Civ 1221.
2 [1960] 1 WLR 196.
3 [2006] 2 Lloyd's Rep 511.
4 [2010] EWHC 211 (Comm).
5 [2010] EWHC 1392 (Comm).
6 Trident Turboprop v. First Flight Couriers [2008] 2 Lloyd's Rep. 581.
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