We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
03 July 2018
In its recent judgment in First Tower Trustees Ltd v CDS (Superstores International) Ltd, the Court of Appeal set down a significant marker that so-called 'contractual estoppel' has no special status and is to be treated as just another form of exclusion of liability. In particular, it was ruled for the first time that any reliance on a contractual estoppel to seek to defend a claim for pre-contractual misrepresentation is an attempt to exclude liability which falls to be assessed for reasonableness under the Unfair Contract Terms Act 1977.
The core passage in the judgment states:
Whenever a contracting party relies on the principle of contractual estoppel to argue that, by reason of a contract term, the other party to the contract is prevented from asserting a fact which is necessary to establish liability for a pre-contractual misrepresentation, the term falls within section 3 of the Misrepresentation Act 1967. Such a term is therefore of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11 of [the Unfair Contract Terms Act].(1)
At a broader abstraction, the judgment points to a wider principle: that a term in a contract cannot prevent other types of law, outside the contract, from operating and applying to a set of facts as they would in the absence of the contract term. A contract can attempt to alter only the consequences which would otherwise flow from applying those other sources of law to the facts as they exist in the real world. By attempting to superimpose some contractual artifice that fiction is to be treated as fact, the contract is excluding or limiting liability which otherwise has a free-standing existence outside the contract. Accordingly, such an attempt is always to be subjected to the statutory controls imposed by the Unfair Contract Terms Act (ie, a test is to be applied by the courts as to whether it is reasonable for the liability to be limited in that way). This statutory control cannot be evaded by contractual terms; it must be faced head on.
CDS (Superstores International) Ltd was a retailer. On 30 April 2015 it entered into leases for three warehouse units (Bays 1 to 3), and an agreement to lease a further unit (Bay 4) – together, 'the contracts' – with First Tower Trustees and Intertrust Trustees Ltd (the landlords). On taking possession of Bays 1 to 3 to carry out works in May 2015, asbestos was found. The agreement to lease Bay 4 was terminated when asbestos was also found in that unit when it became available in June 2015. Remedial works on Bays 1 to 3 were not completed until January 2016.
The landlords sued for specific performance of the agreement to lease Bay 4 and unpaid rent. The claims were later dropped. CDS counterclaimed for losses stemming from the asbestos issues, based on allegations of negligent misrepresentation by the landlords, among other things (eg, claims based in breach of covenant, collateral contract and negligent misstatement).
The circumstances which gave rise to the misrepresentation claims were as follows:
Although CDS's other claims were dismissed at first instance, the judge found that the landlords had made a negligent misrepresentation (under Section 2 of the Misrepresentation Act) which had induced CDS to enter into the contracts. This took the form of the landlords' failure, on receipt of VPS's email, to update and correct their reply to the enquiry stating that they were unaware of any environmental issues concerning Bays 1 to 4.
The judge then considered the so-called 'contractual estoppel' defences raised by the landlords based on the following 'non-reliance' clauses in the contracts:
[CDS]… agree[s] that it has not entered into this Agreement in reliance on any statement or representation made by or on behalf of the Landlord other than those made in writing by the Landlord's solicitors in response to the Tenant's solicitors.
Such clauses are known as 'non-reliance' clauses because they purport as a matter of contract to say that no misrepresentations were relied on, whether that was the case or not.
The judge at first instance considered and applied the test in Springwell Navigation Corporation v JP Morgan(2) (in which he had appeared as counsel for Springwell) in determining whether these clauses were to be classified as 'basis clauses' or 'exclusion clauses'.
The importance of this distinction is that Section 3 of the Misrepresentation Act provides that any clause which seeks to exclude or restrict liability for negligent misrepresentation "shall have no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act; and it is for those claiming that the term satisfies that requirement to show that it does".
The distinction drawn by the Court of Appeal in Springwell was between terms which seek to set out the basis on which the parties are contracting and those which seek to exclude liability. It was said in that case that:
First-instance findings on contractual estoppel defences
The first-instance judge held that both of the clauses in the contracts fell within the category of 'exclusion clauses'. In so doing, he departed from other post-Springwell first-instance authorities (Thornbridge and Sears v Minco)(3) in which it had been held that non-reliance clauses were basis clauses rather than exclusion clauses.
The judge proceeded to consider whether the terms were reasonable under the Unfair Contract Terms Act test. He noted and accepted that the parties were commercial entities of materially equal bargaining power, not dealing on standard terms but able to negotiate terms and were represented by solicitors in the transaction. However, he found that this was not conclusive evidence of reasonableness. He went on to find that:
CDS was given judgment for £1.4 million plus interest.
The landlords appealed the first-instance judgment and it came before the Court of Appeal in late May 2018. There were two substantive judgments in agreement with each other, with the third judge agreeing with both.
Lewison found as follows:
firmly established at this level in the judicial hierarchy that parties can bind themselves by contract to accept a particular state of affairs even if they know that state of affairs to be untrue… Thus as a matter of contract parties can bind themselves at common law to a fictional state of affairs in which no representations have been made or, if made, have not been relied on. (Emphasis added.)
Lord Justice Leggatt agreed with the above and supplemented it with the following findings (which were themselves agreed by the rest of the bench):
Whenever a contracting party relies on the principle of contractual estoppel to argue that, by reason of a contract term, the other party to the contract is prevented from asserting a fact which is necessary to establish liability for a pre-contractual misrepresentation, the term falls within section 3 of the Misrepresentation Act 1967. Such a term is therefore of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11 of [the Unfair Contract Terms Act].
This is a welcome unanimous judgment which firmly reinstates the statutory control imposed by Section 3 of the Misrepresentation Act. Attempts to exclude or limit a party's rights to claim statutory misrepresentation will again – as was intended by Parliament – be subjected to a reasonableness review by the courts.
(1) See www.bailii.org/ew/cases/EWCA/Civ/2018/1396.html, Lord Justice Lewison at Paragraph 111.
(2) The Court of Appeal judgment can be found here.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.