Misrepresentation Act – the Court of Appeal view

Commercial Building
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First Tower Trustees v CDS Superstores [2018] EWCA CIV 1396 Court of Appeal. BLM

Facts

First Tower had a property in Barnsley divided into “bays”.  CDS wanted to lease 4 bays from the landlord and during the usual commercial conveyancing enquiries, CDS asked whether First Tower knew of any environmental problems. It answered that it had not been notified of any such breaches, but that in any event, the tenant must inspect and satisfy itself.  However, just before the deal was done, the landlord received a report stating that there was asbestos present, constituting a health and safety risk.  The landlord did not pass this on to CDS.

Subsequently CDS sued for misrepresentation.  The landlord accepted that there had been a misrepresentation which CDS had relied on and which had induced it to enter into the contract.  First Tower denied liability because clause 5.8 of the lease required the tenant to acknowledge that “this lease is not being entered into in reliance wholly or party of any statement or representation made by or on behalf of the landlord”.

Court of Appeal held

  1. Clause 5.8 was a contractual term which operated to excluded or restrict a liability by virtue of the landlord’s pre-contract misrepresentation. Section 3 Unfair Contract Terms Act characterises this as an exclusion of contractual liability without any legal validity unless the landlord could prove that it was reasonable applying the reasonableness test at Schedule 1 of the UCTA.
  2. The tenant would not have agreed to this exclusion if he had known that there was asbestos in the property. If the effect of this misrepresentation was to deprive a negotiating party of the knowledge he needed to make a decision on whether to agree to contract terms, it would not be fair to hold him to those terms.

Comment

  1. In a finesse of the principle of freedom of contract, Leggatt LJ in this case remarked that while English Law attaches importance to the freedom of parties to a contract to agree on the terms of their contract, it only does so on the basis that their consent to the terms of the contract has been obtained fairly. This cannot be the case where the consent of one party has been induced by misrepresentation made by the other party.
  2. The CA remarked that “the purpose of the Misrepresentation Act was to prevent contracting parties for escaping liability for misrepresentation unless it was reasonable for them to do so”. The court stressed that it was not acceptable to allow liability to be avoided simply by clever drafting. Note the defendant had the burden of proof.
  3. This raises a major question as to the future of “entire agreement” clauses, which are often used to avoid liability for negligent misrepresentations which have induced contracting parties to enter into contractual agreements drafted to exclude liability for such misrepresentation. In future disputes where misrepresentation arises, defendants may not find it as easy to avoid liability simply by reference to contractual drafting.

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