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Non-reliance clauses must be reasonable, appeal court rules

Out-Law Analysis | 27 Jun 2018 | 12:55 pm | 4 min. read

ANALYSIS: Contractual non-reliance clauses will only be enforceable if they are reasonable, the Court of Appeal has ruled.

The decision, although made in a landlord and tenant case, will have ramifications for all kinds of commercial contracts containing clauses in which one party seeks to limit the other's ability to bring a future claim based on reliance on a pre-contractual misrepresentation.

Previously, clauses which provided that a buyer had not relied on representations made by a seller in entering into a contract have been treated as giving rise to contractual estoppel, meaning that the buyer would be prevented from relying on a misrepresentation to bring a claim even if the seller had in fact made a misrepresentation. The court's approach was to categorise such clauses as so-called 'basis' clauses, which set out the basis on which the parties have agreed to deal as opposed to exclusion clauses which exclude liability for misrepresentations. Both the 1967 Misrepresentation Act and the 1977 Unfair Contract Terms Act contain provisions which limit a seller's ability to exclude liability unless it is "reasonable" to do so.

The previous case law did recognise that a 'no representation' clause which effectively re-wrote history between the parties would be treated as an 'exclusion' clause, but there was very limited guidance in the cases on when that would apply. Generally, no reliance clauses were treated as different from exclusion clauses. The Court of Appeal's new analysis is to recognise that a contractual estoppel can still arise at common law, but to say that it is always "subject to statute". In other words clauses which function similarly to exclusion clauses will fall within the Misrepresentation Act and/or the Unfair Contract Terms Act regardless of whether they are structured as basis clauses.

The effect of the Court of Appeal's judgment is that, now, any contract which states that no representations have been made or relied upon by the parties when entering into the contract will be subject to a reasonableness test if a party seeks to rely on it as giving rise to contractual estoppel to counter a claim of misrepresentation. This means that, in every case, a party which wants to rely on a non-reliance clause is going to have to prove why, in the facts affecting that transaction and those parties, the clause was reasonable.

In this case, a commercial landlord responded to pre-lease enquiries from a potential tenant, but then put a non-reliance clause in the lease. It turned out that the premises were unusable due to asbestos contamination, which the landlord should have revealed in pre-lease enquiries.

The relevant clause 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 landlord pointed to this clause as the reason that the tenant should continue to be liable under the lease. On any analysis it was a very unfair situation for the tenant. The tenant might sensibly have wondered why the landlord had engaged in the pre-lease enquiries at all if its responses could not be relied on.

Lord Justice Lewison said that the question for the court was whether, absent the clause in question, the landlord would have been liable for misrepresentation. If so, the clause was not one that simply limited the primary obligation of the contracting party, but was instead an exclusion clause. This being the case, the reasonableness requirement came into play. In this case, the clause was not reasonable and could not therefore be relied upon.

On some level, it was clear that a court could not have allowed this clause to stand, as it goes against the normal process of pre-contract enquiries in property transactions. The court's disdain for the attempted use of an estoppel to exclude liability for the misrepresentation in this case is clear from the words of Lord Justice Lewison, who said: "Although there might be a case where, on exceptional facts, a clause which precludes reliance on replies to enquiries before a 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".

However, the facts of this case are a world away in practice from some circumstances in which other commercial non-reliance clauses are intended to operate.

Take, for example, the crucial non-reliance provisions in the 2002 ISDA Master Agreement, used in derivatives trades. This clause states that each party is acting "for its own account", and is not relying on any written or oral communications from the other party "as investment advice or as a recommendation to enter into that transaction".

The Court of Appeal's judgment implies that, if the clause did not reflect the true state of affairs, the party being challenged would have to prove that these provisions were reasonable before the clause would be enforceable.

Lord Justice Lewison provides some comfort when he says that: "it will always be open to a contracting party seeking to rely on such a clause to establish that it was reasonable; and in cases involving the sale of complex financial products to sophisticated investors it may well be", but the goalposts have nonetheless been shifted. Where previously, the party being challenged could point to the estoppel and usually expect to rely on it, now it will have to prove the estoppel was reasonable.

I am confident that this can be done in the ISDA context, but the critical thing is to get an ISDA case into court ASAP so as to resolve the uncertainty that this case has created.

Mike Hawthorne is a banking and finance litigation expert at Pinsent Masons, the law firm behind Out-Law.com.