First Tower Trustees: contractual fiction clauses, unfair contract terms, parliamentary sovereignty and the limits of party autonomy

In its recent judgment in First Tower Trustees Ltd and Intertrust Trustees Ltd -v- CDS (Superstores International) Ltd, the Court of Appeal has set down a significant marker that so-called contractual estoppel does not have any special status and is to be treated as just another form of exclusion of liability.

For the first time, it has been ruled 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 (UCTA).

The core passage in the judgment is as straightforward and concise as this:

"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 UCTA[1]."

At a broader abstraction, the judgment points to a wider principle that a term in a contract cannot prevent other types of law, from outside the walls of the contract, from operating and applying to a set of facts as they would in the absence of the contract term.  A contract can only attempt to alter the consequences which would otherwise flow from applying those other sources of law to the facts as they are in fact in the real world.  So, no matter how sophisticated a draftsman's attempts to superimpose some contractual artifice that fiction is to be treated as fact, the contract by attempting to do so is excluding or limiting liability which otherwise has a freestanding existence outside the contract.  Accordingly, such an attempt is always to be subjected to the statutory controls imposed by UCTA, 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.  That statutory control cannot be evaded by contractual terms providing that a fictitious world is to be treated as a factual one: it has to be faced head on.

The facts (as they were in fact)

CDS (Superstores International) Ltd (CDS) is a retailer.  On 30 April 2015, it entered into leases for 3 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.  Completion of remedial works on Bays 1-3 was not fully completed until January 2016.

The Landlords sued for specific performance of the agreement to lease Bay 4, and for unpaid rent.  Those claims were later dropped.  CDS counterclaimed for losses stemming from the asbestos issues, based on allegations of negligent misrepresentation by the Landlords amongst other claims (such as claims based in breach of covenant, collateral contract and negligent misstatement).  

The circumstances which gave rise to the misrepresentation claims were as follows:

1. Prior to entering into the Contracts, the Landlords provided CDS with a copy of a report which indicated there were no problems with asbestos (the S2 Report).The judge at first instance found the Landlords had represented to CDS that this report related to Bays 1-3 (although the Landlords denied that in fact it related to any of those units).
   
   
2. In the usual way with conveyancing, there were formal pre-contractual Enquiries made by CDS's solicitors of the Landlords' solicitors.One of these Enquiries asked if the Landlords were aware of "any actual alleged or potential breaches of environmental law .. or other environmental problems relating to the Property".The Reply to Enquiry received from the Landlords in February 2015 in response to this was "The Seller has not been notified of any such breaches or environmental problems relating to the property but the Buyer must satisfy itself". The Landlords were under an obligation to notify CDS if anything came to light before completion which might cause any of the Replies it had given to be incorrect.
   
   
3. On 20 April 2015, the Landlords received an email from a specialist contractor employed by them, VPS group, which warned the Landlords of an asbestos health and safety risk caused by asbestos near the loading bays of Bay 1-3, and warned that there was a risk of the same issue at Bay 4 (the VPS Email).VPS stated that "we are unable to enter this property until we receive the relevant confirmation from yourselves that the site is safe. This would have to be in the form of a Clean Air Certificate or Asbestos Report.".The Landlords did not provide any notice of the VPS Email to CDS until after the Contracts were entered into, and did not notify CDS of any change in their Reply as set out above.

First instance judgment

At first instance, CDS's other claims were dismissed, but the deputy high court judge, Michael Brindle QC, found that there had been a negligent misrepresentation made by the Landlords (under Section 2 of the Misrepresentation Act) which had induced CDS to enter into the Contracts.  This took the form of failure by the Landlords, after having received the VPS Email, to update and correct the Reply to Enquiry they had given stating that they were not aware of any environmental issues with Bays 1-4.

The contractual fictions

The judge then considered so-called contractual estoppel defences raised by the Landlords based on the following 'non-reliance' clauses in the Contracts:

• The agreement to lease Bay 4 contained clauses in which it was said that "[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".
  
  
• The lease for Bay 1-3 contained a clause in which it was said that "[CDS] acknowledges that this lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the Landlord".

Such clauses are known as "non-reliance" clauses, because they purport as a matter of contract to say that no misrepresentations were relied upon, whether in fact that was the case or not.

Mr Brindle QC then 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."

Springwell recapped

The distinction which the Court of Appeal had drawn in Springwell was between terms which seek to set out the basis on which the parties are contracting, and terms which seek to exclude liability.  In essence it was said in that case: 

• Where a term sought retrospectively to alter history it would be an exclusion clause and fall into the requirement for an UCTA reasonableness test.
  
  
• However, where a clause set out that a party would not be making any representations, or representations of certain types (eg investment advice), that was capable of being an agreement that party's contractual obligations meant that nothing that party said or did could amount to an actionable representation (or an actionable representation of that type).In the latter case, there was held to be no exclusion of liability to trigger an UCTA reasonableness assessment under Section 3 of the Misrepresentation Act, as it was said the liability did not arise in the first place.

First instance findings on contractual estoppel defences

Mr Brindle QC 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". 

Having made that finding, Mr Brindle QC proceeded to consider whether the terms were reasonable under the UCTA 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 these were not conclusive evidence of reasonableness.  He went on to find that:

• There was prior authority that a term which excluded liability for representations made outside Replies to Enquiries was reasonable in a commercial conveyancing transaction. As such, the clauses in the Bay 4 agreement to lease withstood the reasonableness test.However, because of that exception, they did not provide a defence against the misrepresentation which the Landlords had made in their Reply to Enquiries.
  
  
• It was not reasonable to seek to exclude representations made in Replies to Enquiries, as that would fundamentally undermine the conveyancing process.

CDS was given judgment for £1.4m plus interest.

Court of Appeal judgment 

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.

Lord Justice Lewison found as follows:

• A "basis clause" is a label for clauses "defining the parties' primary obligations".
  
  
• It was "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)
  
  
• He rejected the obiter finding in Thornbridge that a non-reliance clause is to be considered a "basis clause" rather than an "exclusion clause", and the consequent finding in Sears & Minco that, based on the same reasoning, Section 3 of UCTA was not triggered by such a clause, so no requirement for an UCTA reasonableness review was required.
  
  
• He disapproved of the view that a "non-reliance" clause could be immune from the UCTA reasonableness review imposed by Section 3 of the Misrepresentation Act, and stated "I have also read the compelling analysis of Leggatt LJ on this issue and I agree entirely with what he says" (see further below).
  
  
• On reasonableness, this was an evaluative judgment for the trial judge, and there was no ground for interfering with that.The importance of replies to enquiries in the conveyancing process was good reason to treat the lease clause which did not carve out an exception for those as unreasonable.

Lord Justice Leggatt agreed with the above and supplemented that with the following findings (which were themselves agreed by the rest of the bench):

• There is no reason in principle why contracting parties cannot give up rights to assert misrepresentation, provided that is clearly expressed.
  
  
• However, he doubted that clauses which said that no reliance was placed on representations were in fact clearly giving up such rights, as opposed to stating something which may or may be true[4], although he noted that the Court of Appeal in Springwell had found to the contrary.
  
  
• The use of the term "basis clause" is to be discouraged, because it implies that such clauses are fundamentally core to a contract, when they are no more or less the basis of a contract than the rest of its non-primary obligation terms including other exclusion or limitation clauses.
  
  
• There is a valid distinction between contractual terms which exclude liability and those which prevent liability from arising in the first place.That is a useful distinction when examining the primary obligations undertaken by the contracting parties.
  
  
• However, that distinction is not of any assistance when examining a claim by a contracting party that a contractual term excludes its liability in tort (or by implication, law other than contract).Parties can contract out of such liability, but only subject to the UCTA reasonableness requirement.As the liability arises outside of the walls of the contract (in the immediate case, from the Misrepresentation Act), it cannot be said that the contract is preventing the liability from arising in the first place.The liability exists outside the contract, but its effects can be excluded or restricted by contractual agreement – subject to the statutory provisions of UCTA.
  
  
• Whether the parties were sophisticated business people with the benefit of legal advice was not relevant to considering whether a clause was an exclusion clause or not.Those were factors relevant to whether an exclusion clause was reasonable under UCTA.
  
  
• Applying a reasonable test to any exclusion of misrepresentation was an understandable policy decision by Parliament: it is a control mechanism which protects the mutual voluntary consent which lies at the conceptual heart of freedom of contract.
  
  
• A distinction between terms which prospectively assert that things done in the future cannot be representations, and terms which seek retroactively to alter the status of representations made in the past is not determinative.This arises in the case of multiple contracts, where, say, agreement 1 provides that no representations will be made or relied upon, and then representations are in fact made to obtain agreement 2.There may be instances in which what is said in a prior agreement affects whether, as a matter of fact, the recipient could have understood a (mis)representation to have been being made at all.However, if a court finds that a representation was made and was relied upon before entering into agreement 2, any attempt to rely on a contractual term in agreement 1 to prevent that misrepresentation claim being made out is still an attempt to exclude the (statutory) tortious liability, not an instance in which such liability is prevented from occurring in the first place[5].
  
  
• Although the instant case did not involve any issue of common law negligent misstatement, the judge pointed in no uncertain terms to House of Lords (as then was) authorities which point to the correct approach being to assess whether there is tortious liability, and then to assess whether that liability was excluded by contract[6].This was consistent with the ratio of his judgment on statutory negligent misrepresentation, in that both arise from sources of law outside the four walls of the contract.
  
  
• The judge concluded with what will undoubtedly be the most cited passage from this case.It was quoted in the summary at the start of this article, but bears repetition for its bold concise clarity:

"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 UCTA."