Many contracts include clauses which attempt to limit liability for misrepresentation. They are important as they provide certainty by limiting the parties’ ability to claim on each other outside the terms of the contract.
Despite this, claimants alleging misrepresentation continue to test the limits of these clauses often focusing on issues of construction, reasonableness and allegations of fraud. Generally, the court has found that these clauses stand up to scrutiny but careful drafting is required to make sure they work as intended.
How do parties contractually protect themselves from misrepresentation claims?
There are two clauses typically used to limit liability for misrepresentation: “entire agreement” clauses and “non-reliance” clauses.
Entire agreement clauses attempt to limit what has been agreed to particular contractual documents. Successful drafting prevents pre-contractual representations from being included in the contract, unless it can be proved that this was not the parties’ intention.
Non-reliance clauses are more specific and are used to demonstrate a party’s non-reliance on a pre-contractual representation (estoppel by convention). Alternatively, they can show that the parties have agreed that they would act as if they did not rely on a pre-contractual representation, even if the opposite is true (contractual estoppel).
Construction – what does the clause say?
Claimants alleging misrepresentation may try and limit the impact of entire agreement/non-reliance clauses. The party relying on the clause (to limit or exclude liability) will have the burden of proving its effect.
Take for example the following entire agreement clause from the International Swaps and Derivatives Association master agreement 2002:
“This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter. Each of the parties acknowledges that in entering into this Agreement it has not relied on any oral or written representation, warranty or other assurance (except as provided for or referred to in this Agreement) and waives all rights and remedies which might otherwise be available to it in respect thereof, except that nothing in this Agreement will limit or exclude any liability of a party for fraud.” (emphasis added) (Standard Chartered Bank v Ceylon Petroleum Corporation [2011] EWHC 1785 (Comm) at [568])
And compare it to the non-reliance clause in the same document:
“The parties are not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into that Transaction; it being understood that information and explanations related to the terms and conditions of a Transaction shall not be considered investment advice or a recommendation to enter into that Transaction.” (emphasis added) (Property Alliance Group v RBS [2016] EWHC 207 (Ch) at [207]).
Both clauses say that the parties have not relied on pre-contractual representations. However, the first was held to prevent a misrepresentation claim based on pre-contractual representations, except for fraud or in respect of representations made in the Agreement.
In contrast, the second clause only prevented the claimant from relying on a representation as investment advice or as a recommendation. It would not prevent a claimant from relying on those representations for other purposes.
A party negotiating clauses which limit liability for misrepresentation needs to be clear on their limits. First, this is so that they know whether the term is suitable for their needs. Playing devil’s advocate to test what the clause does and does not include could be useful. Second, knowing the limits of the clause helps identify where the parties need to be particularly careful in pre-contract negotiations to reduce the risk that misrepresentations are made.
Reasonableness – is the clause reasonable?
Claimants could argue that a clause limiting liability is unreasonable and therefore unenforceable.
The Misrepresentation Act 1967 provides that any contract term excluding or restricting (i) liability by reason of misrepresentation (pre-contract), or (ii) any remedy by reason of such misrepresentation, will be ineffective unless it is considered reasonable in accordance with the Unfair Contract Terms Act 1977.
Entire agreement and non-reliance clauses are not automatically unreasonable. In Thornbridge v Barclays Bank [2015] EWHC 3430 (QB), the claimant argued that it was tantamount to re-writing history by including a clause which said pre-contract representations had not been made where in fact they had been. The court held that the clause set out the basis on which the parties had contracted and was therefore reasonable. However, the court in Thornbridge noted that pre-contractual representations which affect a party’s reasonable expectation about the entire agreement or non-reliance clause are likely to be unreasonable and could be held ineffective.
Three practical tips:
- First, good drafting can limit the amount of a clause that is held ineffective if only part of it is held unreasonable. Courts are only willing to invalidate those parts which are held to be unreasonable rather than the clause as a whole. Contracts often state that any part of a clause held to be invalid should not affect the remainder.
- Second, parties may find established non-reliance or entire agreement clauses are suitable for their needs. The Courts will consider how widely used or established a clause is when determining if it is reasonable. The more bespoke a clause is, and therefore the less familiar to a party and the Court, the harder it may be to prove that it was reasonable.
- Third, parties should still be careful about what pre-contract representations they make, in particular avoiding representations that may affect a party’s reasonable expectation about the clauses that attempt to limit liability.
How vulnerable are these clauses to challenges alleging fraud?
Non-reliance or entire agreement clauses cannot prevent liability for fraudulent misrepresentation. At first sight, it would appear that a claimant could circumvent the obstacles of entire agreement and non-reliance clauses by alleging fraud. However, there are still three obstacles for claimants alleging fraud.
First, allegations of fraud require a false representation to have been made knowingly, without belief in its truth or recklessly as to its truth; this is hard to prove.
Second, O3B Africa Ltd v Interactive Solutions (2017) makes it clear that a party alleging fraud has to be able to show it has a good argument for each and every element of a fraudulent misrepresentation claim.
Finally, lawyers have regulatory obligations which prevent them from supporting their client's case alleging fraud where the solicitor does not reasonably believe they have sufficient evidence to show, on the face of it, a case of fraud.
Accordingly, a party trying to prove fraud cannot simply cry fraud; they must be able to show they have a good argument for each element required for a successful claim of fraudulent misrepresentation. Equally, a defendant subject to an allegation of fraudulent misrepresentation should be clear what is required from the claimant.
For more information on reducing the risk of a misrepresentation claim, contact David Hall or Tom Whittaker.