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Unreasonableness to the rescue?

30th September 2011

It has long been established that at common law a person cannot avoid liability for fraudulent statements by inserting a clause in the contract that the other party is not to rely upon them: S Pearson & Son Ltd v Dublin Corpn [1907] AC 351. However, fraudulent or reckless mis-representations are notoriously difficult to prove, not least because, although the civil standard of proof applies, cogent evidence will be required to establish the ‘misdemeanour’. And, of course, the relevant knowledge and/or documentation needed to satisfy the Court are likely to be within the representor’s control.

In some cases the answer may lie in section 11 of the Unfair Contract Terms Act 1977. Section 3 of the Misrepresentation Act 1967 provides that any contractual term which seeks to exclude or restrict liability or damages for misrepresentation has to satisfy the reasonableness test in s.11 of UCTA: the term shall have been a fair and reasonable one to include having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.

In the CLCC last year a judge held that, in the circumstances of the case, Condition 7 of the Standard Conditions of Sale (4th edn) (“SCoS4”), which only allows rescission where an error or omission results from fraud or recklessness, was of no effect because it did not satisfy the reasonableness test.  Accordingly, an order granting rescission of the contract for sale was made.

The case concerned the sale of land as a potential development site. Shortly after they had completed the Commercial Property Standard Enquiries the sellers were given notice of a planning application in respect of the site by a third party (concerning the change of use and development of the site as a medical centre). They appreciated that the planning application would be a material consideration for the purchaser. They consulted their solicitor, who told them not to worry about it. So, despite their continuing obligation to correct any answers given to the Standard Enquiries, they did not do so. The judge found that had the planning application been revealed, the buyers would not have subsequently exchanged the contract for sale.

In this type of situation, even if one had suspicions as to motives of the sellers in not advising the buyer about subsequently obtained information, the best one can argue is that there has been a negligent misrepresentation. The body of evidence is unlikely to meet the high threshold required to establish fraud or recklessness.

The decision was upheld on appeal: Cleaver & Ors v Schyde Investments Ltd [2011] EWCA Civ 929. The Court of Appeal noted that there was nothing unreasonable or unfair about SCoS4 Condition 7 in general, and that it serves to apportion risk in a commercially justifiable way. They also acknowledged that there were strong arguments in favour of upholding it in this case.

The following points can be drawn from the CoA’s judgment:

  • There is no general proposition established by the authorities that it is always reasonable to treat an innocent misrepresentation as unfair if the vendor was aware of the true facts;
  • Simply because both parties are represented by solicitors does not mean that a term cannot be unreasonable. Legal representation is a relevant factor to be considered with the other circumstances of the case;
  • It will be material whether the parties specifically negotiated the relevant term of the contract;
  • The Law Society’s endorsement of the SCoS4 was relevant to the issue of reasonableness;
  • The requirements of contractual autonomy and certainty mean that there will need to be exceptional features in a case which justify holding that an otherwise reasonable term does not satisfy s.11 of UCTA on the facts.

Yet the appellate court’s role is a limited one, akin to reviewing the exercise of a discretion, and it can only disturb the first instance decision if it was satisfied that the judge had “proceeded on some erroneous principle or was plainly or obviously wrong” (applying George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803). Which HHJ Dight had not in Cleaver.

The trial judge is in the best position to assess whether, having heard all the evidence and balanced a whole range of considerations, the term meets the reasonableness test in UCTA. As Longmore LJ observed, this case is a good example of the width of the interference with freedom of contract generated by s.11 of UCTA.

The moral of the story? Firstly, your client may not need to draw inferences about the conduct of the other side if s.11 UCTA can be brought into play. Secondly, be careful of thinking that a disclaimer of liability will always protect your client.

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Sally Wollaston
Sally Wollaston
Business Development and Marketing Director
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