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