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No remedy for pre-contract mis-representation

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The Court of Appeal has recently ruled that a contract clause denying one party the right to rescind the contract or seek damages for the other’s pre-contract mis-representation (false information given which induced the innocent party to enter into the contract) was enforceable in the circumstances of the case, explains Geoffrey Sturgess, Commercial Consultant.

The Unfair Contract Terms Act 1977 (which has nothing to do with unfair terms generally, but only with whether exclusion of liability clauses are enforceable) states that a clause excluding liability for mis-representation will only be enforceable if it satisfies a test of reasonableness, and also makes certain suggestions as to the issues which a court should consider in assessing reasonableness; specifically:

  • Was it a standard clause in a standard contract which could not be negotiated?
  • Did the parties have equal bargaining powers?
  • Was there some trade-off for the innocent party agreeing to accept the clause?
  • Could the innocent party obtain the same goods or services, without the clause, from another?

In Lloyd v Browning (Court of Appeal November 2013) it was held that sellers had made a verbal mis-representation as to the availability of planning permission for a property they were selling, and that the buyers had relied on the mis-representation in deciding to buy, but the sellers were protected by a clause in the contract of sale excluding their liability for any representations made unless the representation had been made (or repeated) in correspondence between the parties’ respective conveyancers.

The court held that the clause was not “unreasonable” because:

  • Both parties were legally advised.
  • They had equal bargaining power.
  • The clause could easily have been circumvented by covering the point in correspondence.
  • The buyers took a deliberate decision to proceed knowing they did not have full information about the planning position.

This is not surprising nor does it create new law. It does however remind us that such exclusion clauses might not be effective in different circumstances (and would be almost impossible to enforce if the innocent party was a consumer).

Lloyd v Browning concerned the sale of land. Exclusion clauses of this nature are commonly found in contracts for the sale of goods and services, for example a contract to supply and commission a new IT system where it is very important to the seller to ensure that what he is contracted to do is very tightly defined.

They are also a standard part of any franchise agreement (where, despite common sense, in the eyes of the law franchisor and potential new franchisee are supposed to have equal bargaining power).

They do not work where the mis-representation was fraudulent—that is, made with the intention of misleading the other.

Those finding themselves tied into commercial contracts as a result of what they consider pre-contract mis-representation should not therefore give up once they find a so called “non-reliance” clause as such clauses may well be unenforceable. In fact the very risk that a particular clause might be held to be unreasonable provides a bargaining chip when arguing about the contract. A bargaining chip that could be used to obtain contractual concessions from the other party which would mitigate the consequences of the mis-representation.

Suppliers who feel they need an effective non-reliance clause in their contracts should consider not only the words of their contract but also the circumstances in which they are likely to use and need it.  If you are looking for advice in this area, you can contact Geoffrey on 02380 717717.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.