2012 Q1 Conveyancing Periodical - Misrepresentations, Let Sleeping Dogs Lie and Lying Vendors Sleep!?

January 2012

by Julian Farrand QC LLD

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Potential purchasers of property must expect to receive encouraging representations by or on behalf of the vendor.  Indeed, many of these representations will be replies to their enquiries.  Purchasers may well believe that they are entitled to rely on such representations.  Unhappily, however, if a representation turns out to be untrue, they would probably be advised that they have no remedy against the vendor.  This advice is wrong in principle: the law does provide remedies even for non-fraudulent misrepresentations - rescission of the contract for sale and/or damages (see the Misrepresentation Act 1967).  But regrettably, for purchasers at any rate, the advice appears likely to be right in practice.

Conditions of sale

This is because solicitors (and other conveyancers) acting for vendors of land have become accustomed to inserting special conditions into contracts for sale protecting their clients from any adverse consequences of being economical with the truth.  An example of such a condition, considered in a recent case, read as follows:

"The Buyer acknowledges that this Contract has not been entered into by the Buyer in reliance upon any representations made by or on behalf of the Seller except those made in writing by the Seller's conveyancers prior to the date hereof as being representations upon which reliance is placed and such as were not capable of independent verification by the Buyer."

Why do solicitors acting for purchasers allow the inclusion of such one-sided conditions, blatantly prejudicial to their clients?  The real reason could be that that they too insert such conditions into contracts for sale when acting for vendors.  Another possible reason might be that these conditions cannot in any case, as a matter of public policy, exclude liability for fraudulent misrepresentations (see per Lewison J - now LJ - in Foodco UK LLP & Others v Henry Boot Developments Ltd [2010] EWHC 358 at para.168).  But proving fraud in court is not easy.

Fair and reasonable?

So perhaps the reason for not objecting to such unfair conditions is that purchasers' solicitors are completely confident that they would never actually apply because section 3 of the Misrepresentation Act 1967 provides (as amended) that:

"If a contract contains a term which would exclude or restrict-

(a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or

(b) any remedy available to another party to the contract by reason of such a misrepresentation,

that term shall be of 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 1977; and it is for those claiming that the term satisfies that requirement to show that it does."

The requirement referred to is that "the term shall have been a fair and reasonable one to be included 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."

Judicial views

Unfortunately, for purchasers, this confident reliance on s.3 of the 1967 Act is naive at best, since the judiciary may hold different views.  Witness Etherton L.J in Cleaver v Schyde Investments Ltd [2011] EWCW Civ 929 at para.38):

 "... there is nothing self-evidently offensive, in terms of reasonableness and fairness, in a contractual term which restricts a purchaser's right to rescind the contract in the event of the vendor's misrepresentation to cases of fraud or recklessness or where the property differs substantially in quantity, quality or tenure from what the purchaser had been led to expect, and to confine the purchaser to damages in all other cases. That is a perfectly rational and commercially justifiable apportionment of risk in the interests of certainty and the avoidance of litigation. While each case turns on its own particular facts, the argument in favour of upholding such a provision as a matter of the commercial autonomy of the contracting parties is particularly strong where, as here, (1) the term has a long history, (2) it is a well established feature of property transactions, (3) it is endorsed by the leading professional body for qualified conveyancers, (4) both sides are represented by solicitors, and (5) the parties (through their solicitors) have negotiated variations of other provisions in the standard form."

The material facts were that replies as to planning applications in a property information form had become false to the knowledge of the vendor before exchange of contracts.  The judge at first instance had found this to constitute an innocent misrepresentation, which entitled the purchaser to rescission of the contract despite the restrictions in Condition 7.1.3 of the Standard Conditions of Sale (4th ed. 2003; now dropped from 5th ed. 2011).  Despite the strong view just quoted, the appeal was dismissed: the judge had been entitled to regard the combination of circumstances as taking the case out of the general run and to hold that the vendor had failed to show that the standard condition in question was fair and reasonable.  Nevertheless, the inclusion of a condition designed to protect vendors from suffering the full legal consequences of their misrepresentations had involved the purchaser in otherwise unnecessary litigation, which might also have been unsuccessful, as indeed it usually is.

Recent cases

Two other recent cases may be cited as illustrative of the pro-vendor/misrepresentor (sic) tendencies of judges.  First, in Foodco UK LLP & Others v Henry Boot Developments Ltd [2010] EWHC 358, agreements for leases contained the following condition:

"This Agreement constitutes the entire agreement between the parties hereto and the Tenant acknowledges that it is entering into this Agreement on the basis of the terms hereof and not in reliance upon any representation or warranty whatsoever whether written or oral expressed or implied made by or on behalf of [Henry Boot] (save for written replies given by [Henry Boot's] solicitors to the enquiries raised by the Tenant's solicitors)."

It was claimed that misrepresentations had been made about motorway signage, visitor numbers and site facilities.  However, Lewison J had no doubt that the clause satisfied the statutory test of reasonableness for the following reasons (para. 177):

"(i) The aspiration of certainty is a reasonable one for the parties to adopt. In most cases it will have the effect of avoiding a 12-day trial such as this one.

(ii) There was no substantial imbalance of bargaining power between the parties. Each of the tenants was a commercial and substantial concern ...

(iii) Each of the tenants was advised by solicitors ...

(iv) The term itself was open to negotiation ...

(v) Perhaps most importantly, the clause expressly permitted reliance on any reply given by the Henry Boot's solicitors to the tenant's solicitors. If, therefore, something of importance had been stated in the course of negotiations upon which the intending tenant wished to rely, its solicitors had only to ask Henry Boot's solicitors for an answer to a question. That would have revealed whether Henry Boot was prepared to formalise the statement so that the tenant could rely on it or whether the tenant would have to undertake its own due diligence."

The second anti-purchaser/misrepresentee (sic) case was Morgan v Pooley [2010] EWHC 2447, where it was claimed that the vendor's negative answer to a pre-contract enquiry about notices affecting neighbouring properties amounted to a misrepresentation. The contract included the special condition of sale already quoted in the second paragraph above and Edwards-Stuart J briefly considered whether it satisfied the statutory test of reasonableness, starting with his conclusion (at para115):

"I would hold that in these circumstances of this case it does so. Mr and Mrs Morgan, or at least their solicitors, knew of the clause and had every opportunity to challenge it if they had thought fit to do so. Had that been done, Mr and Mrs Pooley might well have been advised to stand firm with the result that Mr and Mrs Morgan would not have pressed the point. It is difficult to say. But Mr and Mrs Morgan were obviously very keen on the property and on balance I consider that they would probably have accepted the non-reliance clause if it had been a sticking point. In those circumstances it seems to me that the term is fair. What would not be fair would be to allow a purchaser to keep silent at the stage when he is presented with a draft contract containing the relevant term in a fairly prominent form, with plenty of time in which to consider it, and then to permit him to assert later that he should not be bound by the term."

It is not apparent from the report whether or not the purchasers, Mr & Mrs Morgan, knew of the clause or condition in question but, if not, they might think it negligent of their solicitors not to draw it to their attention.  They might also think it negligent not to challenge such a one-sided condition.

Two-faced Conditions of Sale

However, on the face of it, the current 2011 edition of The Law Society's Standard Conditions of Sale is not one-sided.  It includes seven "Special Conditions", No.6 of which provides: "Neither party can rely on any representation made by the other unless made in writing by the other or his conveyancer, but this does not exclude liability for fraud or recklessness". Then the Explanatory Notes say of this new provision:

"The limitation on liability for representations in special condition 6 aims to exclude liability for oral statements made by or on behalf of the parties. It does not exclude liability for fraud or recklessness. The exclusion is mutual but it is most likely in practice to be relied upon by the seller. Terms similar in effect to special condition 6 are commonly found in contracts. It has been included as a special condition (rather than one of the general conditions) in the light of judicial comments in Morgan v. Pooley [2010] EWHC 2447 (QB) that the clause in that case should be given effect because it was a special condition printed in large type and easily readable."

This explanation expressly recognises that, although theoretically two-sided, the condition is really still one-sided: vendors rarely enter into contracts for sale in reliance on oral statements made by potential purchasers.  So it is suggested that solicitors acting for purchasers should, as a matter of good conveyancing practice, draw this two-faced condition to the attention of their clients with a view to challenging it.  But it is not clear that such a challenge would be regarded as Protocol compliant.  Nor, curiously, would the condition have protected the vendors in Morgan v Pooley - their (mis)representation was not an oral statement: in answer to the crucial question about receipt of notices on the property information form, the word "no" had been written.  And anyway the judge had believed their evidence: they were not lying vendors but, in effect, sleeping dogs.

Julian Farrand QC LLD, is a solicitor and consultant to First Title Insurance plc

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These articles can only be a very brief commentary and should not be relied on as legal advice. No liability is accepted for such reliance.