‘Non-reliance’ clauses examined.

A recent Court of Appeal case held that non-reliance clauses excluding or limiting liability for pre-contractual statements or misrepresentation must be reasonable to be upheld.  It also reminds sellers of the need to carefully update replies to enquiries in lease and corporate transactions.

Misrepresentation

Because of the English law principle of “buyer beware”, it is standard practice in legal transactions for numerous enquiries to take place between the parties before any deal is done. This may be as part of the due diligence and there may also be marketing campaigns and replies to enquiries.

Such statements, whether written or spoken, can give rise to a liability for misrepresentation where the information is not true or is misleading, or where circumstances change and nothing is done to draw the purchaser’s attention to the change.

Contractual protections

Typically, sellers will protect against the risk of a misrepresentation claim by including an entire agreement clause within their legal documentation.  The entire agreement clause often contains a ‘non reliance’ element which states that the buyer does not rely on any pre-contractual statements or representations, and thus no misrepresentation claim can be made out, reliance being an essential element of a misrepresentation claim. The recent Court of Appeal case of First Tower Trustees Ltd & Anor v CDS (Superstores International) Ltd, however, confirms that such non-reliance clauses, must also pass a ‘reasonableness test’ to be upheld.

Facts

The case concerned responses made by a landlord to a prospective tenant’s pre-contractual enquiries. The guidance of the Court of Appeal is however equally applicable to corporate due diligence and all commercial contracts.

The relevant enquiry was whether there was any contamination at the premises. The landlord had replied that it was unaware of any environmental problems relating to the premises. However, shortly before completion of the lease, the landlord became aware that there was in fact dangerous amounts of asbestos on site but kept this information from the tenant.

The lease contained the following non reliance provision:

The tenant acknowledges that this lease has not been entered into in reliance or wholly or partly on any statement or representation made by or on behalf of the landlord.”

The parties agreed that there had been a misrepresentation but the question for the Court of Appeal to determine was whether the landlord could rely on its non-reliance clause and not be held liable for the misrepresentation.

Guidance

The Court of Appeal held that the clause must satisfy the reasonableness test under the Misrepresentation Act.

It determined that the landlord’s non-reliance clause was not reasonable and the claim for misrepresentation was not defeated. The fact that the term had been negotiated between legally represented parties was not sufficient to make it reasonable.  It was pointed out that if such a clause had been upheld, the pre contractual enquiries would be rendered useless.

Practical Steps

As this case shows, English case law is constantly evolving and legal documentation should be regularly reviewed to take account of the many decisions that will affect how a document is interpreted.

Parties should be aware of the need to examine their ‘boilerplate’ provisions regularly as it is here where they will often include the entire agreement and non-reliance provisions. 

Sellers should be aware that non-reliance clauses will be unlikely to allow them to disclaim liability for a clear misrepresentation.  The most important reminder is that where a seller responds to a due diligence or pre-contractual enquiry, it must ensure that the response is accurate, not misleading and corrected if it becomes inaccurate as a result of a change of circumstances.  Where the  target business or company is large or there are for instance property agents, the seller may need to have a process for checking with the key individuals that nothing in the replies needs updating immediately before the transaction completes.

Please contact Fiona Moss for more information. The contents of this article are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this article. © Mundays LLP.

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