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Have no reliance on non-reliance? Clauses excluding misrepresentation must be reasonable.

Jon Turnbull

When commercial parties contract, they usually want to restrict their potential liabilities to the four corners of the document. The law sometimes has other ideas.

Misrepresentation is a classic example. Liability for misrepresentation can be excluded by commonly found “non-reliance” clauses (often found within an entire agreement clause). These clauses set up a contractual estoppel; the parties agree that no representations have been made or relied on (even if they were and they are). These clauses have been important in a number of financial products mis-selling disputes, and operate to defeat a claim for misrepresentation.

Except where section 3 of the Misrepresentation Act 1967 steps in. Any attempt to “exclude or restrict” liability for misrepresentation is subject to the test of “reasonableness” in the Unfair Contract Terms Act 1977.

In First Tower Trustees v CDS the Court of Appeal clarified that the reasonableness test applies to a non-reliance clause, just as it applies to an exclusion clause. You can’t draft around this requirement.

The distinction between a “basis clause” (which defines the parties’ primary obligations) and an exclusion (which carves out liability for breach of those obligations) does not make a difference in the world of misrepresentation, as it might when avoiding liability for negligent misstatement or breach of contract (JP Morgan v Springwell). Non-reliance wording attempts to re-write history to negate a liability that has arisen by statute. It cannot be defining that liability – so is in substance an exclusion. Recent High Court decisions had got confused on this point (Thornbridge v Barclays; Sears v Minco). The test is whether the clause has the effect of excluding liability for misrepresentation. It does not matter how that is done.

In First Tower Trustees, the relevant clause was not reasonable. This was notwithstanding that it had been negotiated by equally matched commercial parties with the benefit of legal advice. This case was about commercial conveyancing. Here pre-contractual enquiries have a distinct and important role. A blanket non-reliance clause would make this process pointless, hence it was unreasonable.

The good news? This does not mean all non-reliance clauses will fail the reasonableness test. The principle that the reasonableness test applies is of general application, but the finding of unreasonableness in this case is specific to an aspect of conveyancing. You have a better chance, the court noted, in “cases involving the sale of complex financial products to sophisticated investors”. Hopefully being reasonable in your drafting is not an unreasonable burden.

Postscript – Don’t forget to exclude non-contractual liabilities

The defendants in this case had another exclusion-related problem. They were trustees and had limited their contractual liability to the trust assets. However, the liability for misrepresentation was a liability under statute – this was not covered by the limitation clause. The trustees were therefore liable out of their own assets. Don’t forget to cover non-contractual obligations in any exclusion clause.

Comments published on Compact Contract do not necessarily reflect the views of Allen & Overy or its clients.

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