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25 Jul 2018

Basis clause scrutinised in misrepresentation claim

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A 'basis clause' is a clause that defines the relationship between the parties (for example, by providing that a party is not giving advice or making representations) rather than seeking to exclude liability. These clauses can give rise to a 'contractual estoppel', preventing the parties from arguing that the terms are not effective. The High Court had ruled earlier this year that the reasonableness of 'basis clauses' could not be challenged under UCTA as UCTA applies to exclusion clauses and basis clauses are not exclusion clauses. However, in a more recent decision, the Court of Appeal held that a clause which purported to be a basis clause was in fact an exclusion clause for the purposes of the Misrepresentation Act and failed to satisfy the test for reasonableness under UCTA.

As we have previously reported, the Court was asked in Carney & Ors v N M Rothschild & Sons Limited to consider the reasonableness/fairness of certain basis clauses in the context of a claim by borrowers against a lender under s.140(A) and (B) of the Consumer Credit Act 1974 ("CCA"). The borrowers argued that there was an unfair relationship between the parties arising out of (inter alia) the terms of a loan agreement, which included certain basis clauses. One of the points argued by the borrowers was that the reasonableness of the basis clauses should be assessed by reference to the Unfair Contract Terms Act 1977 ("UCTA") as this was not too different from the fairness test under the CCA. The Court held that UCTA only applied to exclusion clauses and on the face of them, these were basis clauses and not exclusion clauses. Even if they were exclusion clauses, the clauses in question were held to be reasonable.

In the more recent case of First Tower Trustees Ltd and Intertrust Trustees Ltd v CDS (Superstores International) Ltd, a landlord had leased warehouse premises to a tenant. By clause 5.8 of the lease, the tenant acknowledged that it had not entered into the lease in reliance on any representation made by the landlord. In its replies to pre-contract enquiries, the landlord stated that it was unaware of any environmental problems relating to the property. However, the landlord was aware of asbestos contamination in the warehouse. Remedial works were necessary and the tenant had to lease alternative premises whilst works were carried out.

The Judge found that the tenant had entered into the lease on the basis of the landlord's misrepresentation that there were no problems with asbestos at the premises. He also concluded that clause 5.8 was not a basis clause but an attempt to exclude liability for misrepresentation and it did not satisfy the test for reasonableness under UCTA.

On appeal, the Court of Appeal considered whether clause 5.8 fell within section 3 of the Misrepresentation Act 1967 (the "Misrepresentation Act"), which provides that a clause which excludes liability for misrepresentation is ineffective unless it satisfies the reasonableness test in s.11(1) UCTA.

Therefore, the first question for the Court of Appeal was whether clause 5.8 was an exclusion clause for the purposes of s.3 of the Misrepresentation Act. It found that, although a non-reliance clause could give rise to a contractual estoppel, that did not mean that it was not necessary to consider whether s.3 of the Misrepresentation Act applied. The Court held that clause 5.8 was an exclusion clause on the basis that if it did not exist, the landlord would have been liable for misrepresentation.

The next question for the Court was whether clause 5.8 satisfied the reasonableness test under s.11(1) UCTA. The Court held that it did not. Its reasoning was that the important function of pre-contract enquiries would become worthless if clause 5.8 governed the landlord's liability.

Implications

The important message to take from these decisions is that what may be intended to be basis clauses are not immune to scrutiny, in particular in the context of misrepresentation claims. Whilst a clause may appear on the face of it to be a basis clause (one which states that there is no duty, no relevant advice given or representation made), the Court will scrutinise the clause and consider whether the effect of the clause is actually to exclude liability. If the clause is deemed to be an exclusion clause, the reasonableness of that clause may be challenged under UCTA. It is therefore key that such clauses are drafted as carefully as possible so as to make clear that they define the relationship between the parties (for example, providing that there is no advisory relationship, no duty owed and so on), rather than to exclude a liability that would otherwise be there.

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