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15 Mar 2019

Putting a "stop" to Contractual Estoppel: but on what basis?


Contractual Estoppel has been described as giving "super-charged effect to bank boilerplate clauses1". But to what extent did last year's Court of Appeal judgment in First Tower Trustees Ltd v CDS (Superstores International) Ltd2 diminish this doctrine's 'superpower'? In this article, we explore the current status of the doctrine of Contractual Estoppel and the application of the reasonableness test under UCTA to the field of financial litigation.

Contractual Estoppel & Basis Clauses

One of the fundamental principles of English contract law (and one of the reasons it is so frequently favoured in financial transactions) is its respect for freedom of contract. Less fundamental (and more controversial), are the concepts of 'contractual estoppel' and the 'basis clause'. While contractual estoppel as a doctrine has existed for some 150 years, it is worth briefly exploring the development of the 'basis clause'. This first came under judicial scrutiny in the 2006 case of Peekay v Australia & New Zealand Banking Group3. The Court of Appeal held that a bank's 'basis clause' reciting that the customer was aware of the risks of the transaction and had undertaken his own assessment of its suitability, defeated the customer's misrepresentation claim. Having agreed the basis upon which they were contracting, the court said the parties could not subsequently deny it: the contract itself gave rise to an estoppel.

Subsequent cases upheld such clauses in banking transactions even if the state of affairs referred to in the 'basis clause' did not, in reality, exist. In JP Morgan v Springwell4, the courts explicitly clarified that 'basis clauses' would not be subject to the reasonableness test under section 2 of UCTA. In Barclays v Svizera5, the courts went further stating: "in view of the consistent judicial recognition of the effectiveness of provisions such as [the basis clause] to give rise to a contractual estoppel, the suggestion that in some way that provision should be struck down as unreasonable under ss 3 and 11 of [UCTA] is hopeless."

So far, so good, for freedom of contract.

In 2018, however, this line of judicial thinking appeared to come to an abrupt halt. In First Tower Trustees, the court ruled that in fact 'basis clauses' were not subject to special treatment after all. To the extent that they were seeking to 'get round' the operation of UCTA, Leggatt J expressed his findings as follows: "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."

Although this case concerned replies to enquiries in connection with entering into a lease, the principle expounded by the Court of Appeal potentially has much wider application.

Basis Clause or Exclusion Clause?

While the Court of Appeal was clear that parties cannot circumvent the operation of UCTA by dressing up an exclusion clause as a 'basis clause', there was considerably less clarity about how the courts will identify and categorise such clauses. The analogy used by Lewison LJ of a decorator agreeing to paint the outside of the house except the garage doors (as an example of a basis clause and not an exclusion clause), is fine as far as it goes. What the Court of Appeal chose not to do, is to extend the analogy to show what an exclusion clause looks like, or – more helpfully - a 'basis clause' dressed up to look like an exclusion clause looks like. Would the decorator be saying that the customer had made his own enquiries as to the suitability of the paint?

An alternative approach suggested by Lewison LJ in his judgment is that the courts should identify whether, but for the non-reliance or basis clause, there would be a claim for misrepresentation. If such a claim would exist absent the clause, then it is an exclusion clause which should be subject to the reasonableness test under UCTA.

The potential problem with this approach is that it opens up a degree of uncertainty over the extent to which the courts will interfere with the parties' freedom of contract. 'Reasonableness' is a notoriously difficult concept to pin down. While the rigour with which 'basis clauses' have been upheld to date has led some to describe them as "get out of jail free" cards for banks, the spectre of protracted litigation over the reasonableness of sophisticated contractual arrangements between commercial parties is an equally unattractive prospect.

Misrepresentation and UCTA

Assuming that the courts are able to identify an exclusion clause when they see one (no matter how cleverly the clause is drafted), to what extent will the application of UCTA affect the validity of such a clause? In Raiffeisen v RBS6, (which incidentally introduced another concept in the analysis of basis clauses: namely whether or not the clause was attempting to rewrite history), Mr Justice Clarke summed up the court's approach as follows: "The Courts have on several occasions expressed the undesirability, generally speaking, of striking down terms freely agreed between large commercial parties who are usually to be regarded as the best judges of their own interests".

Three cases of 2018  have supported this proposition. In Goodlife v Hall7, the Court of Appeal upheld a wide exclusion clause as reasonable, identifying in particular the fact that the parties were of equal bargaining position, that insurance was available as an alternative remedy, and that the operation of the exclusion was clearly understood by both parties. In Motortrak, again, an exclusion clause was upheld for parties of equal bargaining power but also key here was the reciprocity of the clause: it cut both ways. Finally, in Interactive E-solutions, the court upheld a widely drafted exclusion clause where the parties were of equal bargaining power and the allocation of risk was clearly understood as flowing from the exclusion.

What next and how to draft for it?

It is hard to escape the conclusion that the courts have severely clipped the wings of the doctrine of contractual estoppel. Previous case law shielding 'basis clauses' from the application of statutory 'reasonableness' tests has plainly been overturned. Lewison LJ has described the label 'contractual estoppel' as unhelpful, and others have gone so far as to describe it as illegitimate. Whether or not the doctrine can still fly remains to be seen. In Premium Credit Limited v Primary Care Management Solutions Ltd [2018] EWHC 3083, (decided some months after First Tower Trustees) Mr Justice Andrew Baker referred only obliquely to the "somewhat controversial" nature of the doctrine of contractual estoppel and appeared perfectly content (obiter) to hold that if necessary he would have granted summary judgment on the basis of a contractual estoppel argument.

For now, it appears that the prudent course in practice is not to rely on a 'non-reliance' or basis clause. Rather than remove such clauses, however, it will be necessary to analyse the extent to which they are 'reasonable'.  Where parties do not have equal bargaining power, the party taking the benefit of the basis clause will need to take steps to ensure that the other party understands its proposed effect at the pre-contract stage. Banks in particular need to be aware that it may no longer be sufficient simply to remove liability by way of contract – the will of Parliament and the application of its statutes must also be borne in mind.


1 Gerard McMeel 15.12.14
2 [2018] EWCA Civ 1396
3 Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] 1 CLC 582
4 JP Morgan Bank v Springwell Navigation Corp [2008] EWHC 1186
5 Barclays Bank v Svizera Holdings BV [2015] 1 All ER (Comm) 788
6 Raiffeisen Zentralbank Osterreich AG v The Royal Bank of Scotland Plc [2011] 1 Lloyd's Rep 123
7 Goodlife Foods Ltd v Hall Fire Protection Ltd [2018] EWCA Civ 1371; Interactive E-solutions JLT v O3b Africa Ltd [2018] EWCA Civ 62; and Motortrak Ltd v FCA Australia Pty Ltd [2018] EWHC 990 (Comm)