Courts reluctant to interpret standard entire agreement clauses to exclude misrepresentation claims

MDW Holdings Ltd v Norvill & Ors [2021] EWHC 1135 (Ch)

The question

Will a standard entire agreement clause protect a seller from liability for misrepresentation?

The key takeaway

The Courts are reluctant to interpret standard entire agreement clauses as excluding liability for pre-contractual misrepresentation.

The background

GD Environmental Services Ltd (GDE) operated a waste management business, processing various wet and dry waste including cess waste and leachate. These activities were subject to applicable regulations and environmental permits. GDE did not have active facilities to treat wet waste so it was taken to Dwr Cymru Welsh Water’s (DCWW) treatment works for processing. 

Between 2013 and 2015, samples gathered by both GDE and DCWW revealed that the leachate discharged exceeded prescribed limits. Despite DCWW providing GDE with an improvement plan in May 2015, further samples still contained restricted contaminants. GDE requested an increase in contaminant limits, although it was not approved by DCWW.

In 2015, the Buyer (MDW) agreed to purchase the share capital of GDE from the Sellers. Before entering the SPA, MDW submitted a legal due diligence request, including various environmental questions. The Sellers’ response stated that there were no outstanding investigations/enforcement actions and said nothing about ongoing breaches.

The SPA was signed on 14 October 2015 and included general and detailed warranties relating to GDE’s environmental permits and compliance records. The warranties were subject to contractual limitations on the Sellers’ liability, including a provision excluding warranty claims unless written notice was given within two years of completion. Clause 7.7 stated that nothing would exclude the Sellers’ liability for claims arising from dishonesty, fraud, wilful misconduct or wilful concealment. The SPA also contained a standard entire agreement clause. 

In August 2017, the Buyer notified the Sellers of its claims under the SPA regarding trade effluent consent breaches which the Sellers had failed to disclose. The Buyer wrote to the Sellers again in October 2017 indicating that the claimed amount was in excess of £1m. A letter of claim followed on 17 January 2019, seeking damages for breach of warranties and for pre-contractual misrepresentation. 

The Sellers argued several contractual defences, including that the warranty claims were barred by limitation because the Buyer had not initially summarised the amount claimed, and that the entire agreement clause extinguished all prior representations. 

The decision

The court rejected the Sellers’ arguments and ruled in favour of the Buyer. The notification limitation in the SPA set a low threshold and the Buyer had provided a summary of its claim so far as was reasonably practicable at that time. In any event, clause 7.7 allowed the Buyer to pursue its breach of warranty claims regardless of notice limitation, as breaches of warranty had occurred as a result of wilful misconduct on the part of those controlling and running GDE. 

Having found in favour of the Buyer regarding its primary warranty breach claim, the Court went on to consider misrepresentation. It found that the purpose of the entire agreement clause was to make it clear that nothing said, written or done prior to the SPA created any contractual liabilities.

Nothing in the SPA stated that there had been no reliance on a representation or that liability for representation was excluded. The statements made by the Sellers were actionable misrepresentations and had induced the Buyer to enter the SPA. 

Why is this important?

The courts have again rejected the argument that a standard entire agreement clause excludes a party’s liability for misrepresentation. 

Any practical tips?

If you wish to exclude liability for pre-contractual misrepresentations, you should include additional contractual wording. This might include statements concerning:

• non-reliance (a party has not relied on any representations in entering an agreement)
• non-representation (a party has not made representations leading up to the agreement)
• express exclusion of liability for misrepresentation (regarding pre-contractual statements)
• an express waiver of non-contractual remedies.

Note that such exclusions will not be effective for fraud/fraudulent misrepresentation, and such exclusions are also subject to the reasonableness requirement under s. 3 Misrepresentation Act 1967/Unfair Contract Terms Act 1977.