Misrepresentation and answers to enquiries
- "Not so far as the vendor is aware" - what exactly does this phrase mean? Is it safe to use it?
- Missing fixtures that were there on inspection and which have been lifted prior to exchange - is there any liability if the seller does not tell the buyer that they have been taken away?
- Do entire agreement clauses work?
- Do exclusion clauses work?
- If there is a misrepresentation, will the contract be rescinded or will the court award damages in lieu?
- Do damages need to be reduced if the property has increased in value?
Many of these disputes are mediated. If you would like to mediate your dispute please go to The Property Mediators website.
When confronted with a misrepresentation issue the two core provisions to have in mind are (i) s2 of the Misrepresentation Act 1967 and (ii) the terms of the contract, the key provisions of which will usually be contained in standard conditions.
Misrepresentation Act 1967
Section 2(1) of the 1967 Act is in the following terms:
"Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable nowithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and did believe up to the time of the contract was made that the facts represented were true."
The key points to note about the section are that:
- It establishes a duty of care - there is no need to establish that it was reasonably foreseeable that if a misrepresentation was made a loss would be suffered.
- It reverses the usual burden of proof - so that once it is established that there has been a misrepresentation it is for the person who made the representation to prove that he had reasonable grounds for believing that the representation was true.
- The person who made the representation must prove that he had reasonable grounds to believe it was true up to the time of the contract.
Section 2(2) of the 1967 Act deals with remedy of rescission and the ability of the court to award damages in lieu or rescission. This will be dealt with below. Section 3 deals with clauses which seek to exclude or restrict liability for misrepresentation. This issue will also be dealt with below.
The terms of the contract
In any particular case it is obviously necessary to look at the terms of the contract that are applicable to the contract in question. By way of example, the Standard Conditions of Sale (4ed), contain the following relevant clauses:
"7.1 Errors and omissions
7.1.1 If any plan or statement in the contract, or in the negotiations leading to it, is or was misleading or inaccurate due to an error or omission, the remedies available are as follows.
7.1.2 When there is a material difference between the description or value of the property ... as represented and as it is, the buyer is entitled to damages.
7.1.3 An error or omission only entitles the buyer to rescind the contract:
(a) where it results from fraud or recklessness, or
(b) where he would be obliged, to his prejudice, to accept property differing substantially (in quantity, quality or tenure) from what the error or omission led him to expect."
We shall return to these provisions below. We now turn to various issues that have arisen in the cases.
Property Information Form
The importance of the Seller accurately completing the Property Information Form is demonstrated by the decision in McKeekin v Long  29 EG 120. The form contains the following two questions under the heading "Disputes":
- "Do you know of any disputes about this or any neighbouring property?"
- "Have you received any complaints about anything you have or have not done as owners?"
The importance of giving correct answers to these questions is made plain on the form itself:
- "It is very important that your answers are correct because the buyer will rely on them in deciding whether to go ahead. Incorrect information given to the buyer through your solicitor, or mentioned to the buyer in conversation between you, may mean that the buyer can claim compensation from you or even refuse to complete the purchase".
In this case the sellers answered both questions in the negative. They also made a verbal representation that the "neighbours were good and friendly". In fact that there were on-going disputes about parking on the access road, over which the sellers had a right of way on land owned by neighbours, and about rubbish. The buyers claimed damages for misrepresentation. The sellers' defence was that the dispute had been resolved when a jointly instructed solicitor had advised them that the neighbours were right in law in relation to the parking. They also said that although there had been an incident relating to rubbish it did not constitute a dispute. However, the judge (Astill J) held that
- "the truth of the matter is that there was an atmosphere of constant confrontation between Mr and Mrs Cooper (who owned the land over which the right of way passed) and the other occupants of the houses on the road. ... The correspondence I was taken to during the evidence .. led me to the clear conclusion that Mrs Long knew that there were disputes about both parking and the dumping of rubbish".
He found that the buyers had established fraudulent misrepresentation and said:
- "The seller's property information form could not be expressed in clearer language. It is not a lawyer's form, but one that is designed for everyone to be able to understand. There could be no confusion or misunderstanding about the questions... Given the background, as I accept it from the evidence, when the defendants came to answer those two questions, it is impossible to conclude other than that they must have known that they were not being truthful when they answered those two questions. So simple are those questions to understand and to answer, and so obvious were the disputes that had and still exist, not just in relation to the defendant's property but to the other properties using the access road, that it is not possible to conclude that, in answering them falsely, that was done merely recklessly or carelessly."
This case obviously turns up on its own facts but it does highlight how important it is fully and frankly to answer the questions about disputes (and indeed any of the other questions) on the form. It is becoming increasingly common for buyers to sue for fraudulent misrepresentation in these sorts of cases.
"Not so far as seller is aware"
This is a commonly used answer that is given to enquiries before contract - but what exactly does it mean? And is there any danger in using the phrase?
The leading case
In short, use of the phrase implies that the seller has taken reasonable steps to investigate the true position. The key case is William Sindall plc v Cambridgeshire County Council  EWCA Civ 14. The enquiries before contract asked the following question:
- "Is the vendor aware of any rights .. specifically affecting the property, other than any disclosed in the draft contract or immediately apparent on inspection, which are exercisable by virtue of any easement .. or which are in the nature of public .. rights?"
The answer given was:
- "Not so far as the vendor is aware".
There was in fact a sewer going across the land with the benefit of an easement. The sewer was recorded in documents held by the city planning department but these were not discovered at the time. The site was purchased for development and the existence of the sewer made development of the site more problematic. The purchaser sought to rescind. We shall come back to the question of remedy later (ie rescission or damages in lieu of rescission) but the first issue was whether or not liability had been established. Had there been a misrepresentation? What exactly did the words "not so far as the vendor is aware" mean? Were they misleading? Hoffmann LJ:
"It is well established that a statement that a vendor is not aware of a defect in title carries with it an implied representation that he has taken reasonable steps to ascertain whether any exists. This may require him, in the first instance, to examine his title deeds and other records, inspect the property, and obtain legal advice. If there is anything to put him on inquiry as to the existence of a defect, he may have to pursue the matter further by questioning others, or examining their documents .. the answer 'Not so far as the vendor is aware' represents not merely that the vendor and his solicitor had no actual knowledge of a defect, but also that they have made such investigations as could reasonably be expected to be made by or under the guidance of a prudent conveyancer."
The council had not taken such steps and so was held to be liable. This should provide a salutary lesson for those who use the phrase without much thought and where what they really mean is: "We don't know and we have not tried to find out".
Find out for yourself!
The decision in Clinicare Limited v Orchard Homes Developments Limited  EWHC 1694 (QB) is perhaps even more worrying. It was concerned with a lease of commercial premises. In the pre-contract enquiries T asked whether the building had ever suffered from dry rot. L's solicitor replied:
- "The vendor is not aware of any such matters, however we suggest you make and rely upon your own inspection and survey."
The first half of the sentence carries the dangers with it referred to above. However, one might think that the second part of the phrase was sufficient to have dealt with the problem. T did obtain its own full survey which showed that there was dry rot in the roof space and advised T to carry out remedial works. In relation to another area, the staircase, T's surveyor wrote:
- "We understand from the landlord that the staircase is new as the previous one suffered from dry rot and had to be replaced. We recommend the extent of the dry rot and the remedial works undertaken be confirmed by the specialist employed by the landlord."
However, T failed to do that. Some time after the lease was granted a substantial amount of dry rot was found around the staircase. T had to vacate so that works could be carried out to get rid of it. T claimed damages for misrepresentation.
Held: The written reply to the pre-contract enquiry carried with it an implied representation that L had taken reasonable steps to ascertain whether the property had suffered from dry rot. The representation was clearly false and was not subsequently corrected. T had been in part induced by the representation to enter into the lease, notwithstanding that T had obtained its own survey! The judge at para 48 of the judgment:
"I have reached the conclusion that Mr Andrews' decision [ie the decision of the director of the tenant company] to ignore [the] surveyor's advice, in the belief that the dry rot was limited to the northern roof space was in part induced by [L's] misrepresentation. He believed that [T] was sufficiently protected because he believed that [L] had cured the dry rot in the staircase and had taken reasonable steps to investigate the outbreak of the dry rot. It was those representations, which, in part, induced him to ignore [T's surveyor's advice] and enter into the lease with the side agreement in the belief that there was no other outbreak of dry rot and it was unnecessary to investigate further."
Some may consider the case to be wrongly decided! But note:
- The importance of being very careful when using the words "not so far as the vendor is aware" even where there is an additional caveat.
- There may be other factors influencing the decision but so long as the misrepresentation was one of them, the claimant will succeed. "In order to found an action for misrepresentation the representation must induce the representee to alter his position for the worse. The representation however, need not be the sole inducing cause" (para 40 of the judgment citing Edington v Fitzmaurice  29 Ch D 459).
The "William Sindall" clause
A number of conveyancers seem now to be using this long-winded and absurd clause in the special conditions to get round the effects of the William Sindall case:
"In the light of the decision in William Sindall plc v Cambridge County Council (1994) 3 All ER 932, it is agreed and declared that the reply to any enquiry or information supplied in an property information form is given to the best knowledge, information and belief of the Seller, and that neither the Seller nor his legal representative has made any further enquiries into such matters (such as, but without limitation – conducting a site inspection or making specific enquiries of statutory authorities or utilities), and the replies are therefore given on that basis."
It made an appearance in Morgan v Pooley  EWHC 2447 although did not have any effect on the outcome of the case as the judge held that there was in fact no misrepresentation. Whether or not a court actually comes to the conclusion in a relevant case that it works or that it is simply waffle, or possibly breaches s3 of the 1967 Act (see below) remains to be seen.
At the end of the day if a seller is not aware of the answer to a question he is best advised simply to say so and to add that he has not made any enquiries to establish the true position. What is wrong with the following?
- "No. And no enquiries have been made."
It is of course true that a buyer may be put off by such an answer but he is also not likely to be much impressed by the answer "not so far as the vendor is aware". And use of the latter phrase, as has been seen, carries real risks.
Items seen by purchaser on inspection removed before exchange
Breach of contract?
Where a seller removes a fixture between exchange and completion there is obviously a problem. What about a situation where a potential purchaser sees a property, likes a particular feature about it, but the seller then removes it before exchange of contracts? Can there be any liability? One would think not. However, in Taylor v Hamer  EWCA Civ 1130;  EG 127 liability was established. As will be seen there was a fraudulent misrepresentation. However, the Court of Appeal reached its decision on the basis of contract. It is therefore possible that a perfectly innocent seller who removes a fixture prior to exchange could be held liable in contract even in the absence of a misrepresentation.
The case was concerned with a posh property out in the countryside. It had an area call the 'dog garden'. When the purchaser viewed the property 'the dog garden' was covered in flagstones. Prior to exchange the seller removed the flagstones and, in answer to an enquiry, made a false statement about them not being removed from the property. These are the key paragraphs in the judgment relating to the facts:
"4. Over the weekend of 3 to 5 May 1997, about 282 square yards of these flagstones were taken up, on the instructions of the respondent's husband, and stacked in a field outside the cartilage of the property. On the husband's instructions, grass was laid in their place. The judge found that the respondent's husband wished to disguise the fact that the flagstones had been removed.
5. On 21 May 1997, a representative of the appellant's solicitor visited the property. He saw and photographed the flagstones where they had been freshly stacked. On the following day, 22 May 1997, he raised the following enquiry before contract: 'With regard to the pile of paving slabs (between Easington Hall and the pond immediately to the west) have these been taken from the cartilage of the Hall? If so, has listed building consent been obtained for this?'
6. The response, dated 23 May 1997, was 'No and they are not included in the sale, but they are to be removed by the vendors.'
7. The judge held that this answer was made fraudulently, in that the respondent's husband knew that the flagstones had been removed from the dog garden, and gave the answer with the respondent's authority".
The seller was held (by the CA, 2-1) to be in breach of contract (not just in tort for deceit) and was ordered to restore the flagstones to their former location or to indemnify him the cost of so doing. The flagstones were part of "the property" that the seller had agreed to sell to the purchaser. This was despite the fact that the contract incorporated the standard conditions that include an entire agreement clause (about which more below). The seller, having surreptitiously moved the flagstones and subsequently lied about it could not rely upon the entire agreement clause. This is how Sedley LJ put it at para 90, 91 and 92:
".. the meaning to be ascribed to 'the property' in the conveyance is the meaning it would be given by a reasonable person who knows what the parties knew at the time they contracted. ..On [the Judge's] findings, it includes the facts that the claimant had been shown the premises that included the flagged dog garden, and that he had not been told before contract that this was no longer part of the realty...
This would probably be enough .. to make the flagstones part of 'the property' for which the parties went on to exchange contracts. But here, additionally, the vendor deliberately induced the buyer, through his solicitor, to believe that there had been no such alteration.
Against this background, any reasonable person, in my judgment, would have understood the property that was being bid for, and contracted for, to include the flagstones in the dog garden. The case falls outside the caveat emptor paradigm ... because the vendor, by his conduct in inviting an offer for the property as shown to the purchaser, and without any explicit subtraction from it, represented that it was to include the flag garden."
It seems to me that the decision was wrongly decided and that Sedley J, and Wall J who made similar comments, have adopted rather muddled thinking, mixing up principles of contract and misrepresentation. (Arden LJ dissented). How much influence the case will have remains to be seen. It is of course a Court of Appeal decision and therefore binding on lower courts. However, there is at least one case where it was sidestepped.
In Sykes v Taylor-Rose  EWCA 299 the sellers sold a house in which a gruesome murder had taken place. In the enquiries before contract the following question appeared: "Is there any other information which you think the buyer may have a right to know?" The sellers honestly answered "no". They knew about the murder but considered that they were under no obligation to disclose information relating to it to the buyer. The judge at first instance and the Court of Appeal agreed. The buyer's claim for misrepresentation was dismissed. At first instance Taylor v Hamer was cited to the judge. This is what he said about it:
“Mr Toone frankly accepts that he is asking the court to take a great leap forward in the development of the law. He says that the principle of caveat emptor, hallowed though it may have been in the past, is nearing the end of its useful life. The terminal state of the principle is demonstrated, it is submitted, by the recent decision of the majority of the Court of Appeal in Taylor v Hamer ... I have considered that case. It does not, in my judgment, mark the sea-change for which Mr Toone contends. It seems to me that the decision in Taylor v Hamer depended on the interplay of three relevant considerations. These were the definition of the property to be sold in the contract; a clause in that contract which stated that the purchaser was deemed to have inspected the property; and the giving of an answer regarding fixtures, surreptitiously removed by her husband, which the vendor was found to have given fraudulently. The case does not, in my judgment, have any wider significance."
Nothing more was said about the case in the Court of Appeal. I suspect that in future cases courts will limit Taylor v Hamer to its own facts. However, buyers and sellers and their solicitors don't want to get involved in litigation. The case thus highlights once again the importance of the Sellers Property Information Form and the need accurately to state what is staying and what is going.
An acknowledgement of non-reliance in a contract can operate as an evidential estoppel. In Lowe v Lombank  1 All ER 611 it was held that there are three matters to be satisfied before such a conclusion will be reached:
- That the clause is clear and unambiguous.
- That it was intended to be acted upon.
- That the party to whom the statement of non-reliance was made (in our situation the seller making the misrepresentation) believed it to be true and was induced by such belief to act on it.
The third requirement in particular can often make the clause difficult to rely upon especially in a low level transaction such as where a representation is made during the sale of a house. This is made clear by Chadwick LJ in Watford Electronics Ltd v Sanderson CFL Ltd  EWCA Civ 317. Note the distinction made in the case (which was not in fact concerned with the sale of a property) between commercial and non-commercial contracts. Chadwick LJ:
"39. The effect of an acknowledgement of non-reliance ... was considered in this Court in E A Grimstead & Son Ltd v McGarrigan (unreported, 27 October 1999). In a passage which was obiter dicta.. but which followed full argument on the point .. I said this (at page 32A-C of the transcript):
'In my view an acknowledgement of non-reliance… is capable of operating as an evidential estoppel. It is apt to prevent the party who has given the acknowledgement from asserting in subsequent litigation against the party to whom it has been given that it is not true. That seems to me to be a proper use of an acknowledgement of this nature, which .. has become a common feature of professionally drawn commercial contracts.'
I went on, at page 35A-C, to say this:
'There are, as it seems to me, at least two good reasons why the courts should not refuse to give effect to an acknowledgement of non-reliance in a commercial contract between experienced parties of equal bargaining power a fortiori, where those parties have the benefit of professional advice. First, it is reasonable to assume that the parties desire commercial certainty. They want to order their affairs on the basis that the bargain between them can be found within the document which they have signed. They want to avoid the uncertainty of litigation based on allegations as to the content of oral discussions at pre-contractual meetings. Second, it is reasonable to assume that the price to be paid reflects the commercial risk which each party .. or, more usually, the purchaser .. is willing to accept. The risk is determined, in part at least, by the warranties which the vendor is prepared to give. The tighter the warranties, the less the risk and (in principle, at least) the greater the price the vendor will require and which the purchaser will be prepared to pay. It is legitimate, and commercially desirable, that both parties should be able to measure the risk, and agree the price, on the basis of the warranties which have been given and accepted.'
40. It is true that an acknowledgement of non-reliance does not purport to prevent a party from proving that a representation was made, nor that it was false. What the acknowledgement seeks to do is to prevent the person to whom the representation was made from asserting that he relied upon it. If it is to have that effect, it will be necessary .. as I sought to point out in Grimstead v McGarrigan .. for the party who seeks to set up the acknowledgement as an evidential estoppel to plead and prove that the three requirements identified by this Court in Lowe v Lombank Ltd  1 WLR 196 are satisfied. That may present insuperable difficulties; not least because it may be impossible for a party who has made representations which he intended should be relied upon to satisfy the court that he entered into the contract in the belief that a statement by the other party that he had not relied upon those representations was true. But the fact that, on particular facts, the acknowledgement of non-reliance may not achieve its purpose does not lead to the conclusion that the acknowledgement is ... in substance an exclusion clause to which section 3 of the Misrepresentation Act is applicable' ".
In Morgan v Pooley  EWHC 2447 the judge dismissed a claim for misrepresentation on the facts. There had been no misrepresentation. However, the seller had also relied upon a non-reliance clause in the special conditions which was in the following terms:
"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."
In relation to that clause the judge said as follows at para 114:
"In my view, there is a difference between two types of situation. The first is where the non-reliance clause is one of many clauses in a long contract prepared by lawyers which the parties to it may have had limited opportunity to read in detail beforehand. In that situation it might well be argued successfully that the party relying on the clause should not be allowed to do so because the clause falls with the contract when it is avoided for misrepresentation. The second type of situation is like the one here. As I have already explained, the Special Conditions were known to Mr and Mrs Morgan, or at least to their solicitors, well before they entered into the contract but probably after they had seen the SPIF. It was a short document and the conditions were printed in large type and were easily readable. This, taken together with the early notice that the sellers were entering into the transaction on the basis of the William Sindall clause, leads to the conclusion that in the circumstances of this case the non-reliance clause should be given effect."
However, it is difficult to see how the clause in this case could possibly apply to the situation: the representation (that no notice was served) was in writing, the words "as being representations upon which reliance is placed" don’t seem to make much sense as it is the buyer not the vendor who might be relying on the representation; and the representation (that no notice was served) was not capable of independent verification by the buyer. As indicated above in Watford Electronics Ltd the Court of Appeal made a different broad distinction, ie. between commercial and residential agreements.
(When dealing with entire agreement clauses consider all the following cases: Peekay v Australia and New Zealand Banking Group  EWCA Civ 386 at paras 56 and 57; Springwell v JP Morgan Chase Bank  EWCA Civ 1221, paras 141 to 171; AXA Sun Life Services PLC v Campbell Martin Ltd  EWCA Civ 133, paras 34-36).
As to the effect of s3 on non-reliance clauses see below.
"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,
the term shall be of no effect except in so far as it satisfied 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 the requirement to show that it does."
Under s11(1)of the 1977 Act the requirement of reasonableness 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". There are also a number of guidelines in Schedule 2 of 1977 Act which might assist in any particular case in determining whether the requirement of reasonableness is satisfied.
In Walker v Boyle  1 All ER 634 the question asked was as follows:
- "Is the vendor aware of any disputes regarding the boundaries, easements, covenant or other matters relating to the property or its use?"
The answer given was "Not to the vendor's knowledge .."In fact there was a dispute. The answer was given innocently by the seller's husband, who was not aware of the dispute, on behalf of the wife. The vendor sought to rely upon condition 17(1)(a) of the National Conditions of Sale (19ed) which said:
- "no error, misstatement or omission in any preliminary answer concerning the property .. shall annul the sale nor (save where the error, mis-statement or omission is in a written answer and relates to a matter materially affecting the description or value of the property) shall any damages be payable, or compensation allowed by either party, in respect thereof".
The court held that this was an unfair contract term that did not assist the vendor. The fact that it was contained in standard conditions did not prevent it being unfair. Thus, the mere fact that the current conditions contain a similar term does not of itself mean that the clause will be regarded as fair. Each case will depend on its own facts having regard to the requirement of reasonableness.
In Cleaver v Schyde Investments Ltd  EWCA Civ 929 the Court of Appeal upheld the judge's decision that the buyer was entitled to rescind the contract on the basis that there had been a misrepresentation; and that the exclusion clause in the Standard Conditions of Sale (4th edition) did not protect the seller as, in the circumstances of the case, the clause was unfair.
The contract was to purchase a site upon which the buyer wished to build a residential development. The seller made a representation, in answer to the enquiries before contract, that there were no planning applications in relation to the site. That was true at the time. However, an application for planning permission was subsequently made by a third party to build a health centre on the site. The seller who was aware of that fact failed to notify the buyer of the change in circumstances prior to exchange of contracts. The buyer only became aware of the planning application following exchange and gave notice that it elected to rescind the contract. The fact of the application was an important factor for the buyer in its decision to purchase. Etherton J at para 52:
- "At the date of the contract the [Seller] knew of that planning application and that it would be material to the intentions of the [Buyer]. The [Seller] had that knowledge, and failed to disclose the fact that the application had been made, at the very time that they were entering into a contract which would remove the right of the [Buyer] to what would otherwise be its right to rescind for misrepresentation. Moreover they were doing so notwithstanding their express promise, in Paragraph F of the introduction to the Standard Enquiries, that they would notify the [Buyer] on becoming aware of anything which might cause any reply they had given to be incorrect, and notwithstanding their agreement that the [Seller's] solicitors written replies to the written pre-contract enquiries would be excluded from the "entire agreement" provisions of Condition 12 of the Special Conditions."
The county judge found that there had been an innocent misrepresentation and that the buyer would not have entered into the contract had it known of the planning application. The buyer was entitled to rescind the contract and was entitled to the return of its deposit. The seller relied upon condition 7.1.3 of the Standard Conditions of Sale (Fourth Edition) which, as seen above, states as follows:
- "7.1.3 An error or omission only entitles the buyer to rescind the contract:
- (a) where it results from fraud or recklessness, or (b) where he would be obliged, to his prejudice, to accept property differing substantially (in quantity, quality or tenure) from what the error or omission led him to expect."
The seller argued that as there had been no fraud or recklessness and that the buyer was not obliged to accept property differing substantially from what the error or omission had led the buyer to expect, the buyer should not be entitled to rescind. However, the judge found that in the circumstances of the case condition 7.1.3 was not fair and reasonable. It therefore failed to satisfy the requirements of s11 of Unfair Contract Terms Act 1977 as incorporated into s3 of the Misrepresentation Act 1967. The seller appealed.
The appeal was dismissed. Although there was nothing inherently unfair in condition 7.1.3, the judge's decision was not based on an error of principle and was not plainly and obviously wrong. Etherton LJ at paras 38 and 39:
"… 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 question remains, however, whether, on the facts of this particular case, it can be said that the Judge, in the words of Lord Bridge in George Mitchell, proceeded on the basis of some error of principle or was plainly and obviously wrong."
And at para 50:
"For the reasons I have given earlier () it would require some exceptional feature or combination of features to enable a court to conclude that Special Condition 7.1.3 failed to satisfy the test of reasonableness in section 3 of the 1967 Act and section 11 of UCTA. Each case turns on its particular facts, and the onus is on the person relying on the exclusion provision to establish that it was fair and reasonable. In the present case, the Judge, after a three day trial, weighed up all the facts and concluded that, due to a combination of features, the appellants had failed to satisfy him that Special Condition 7.1.3 was fair and reasonable. Although I am far from certain that I would have reached the same conclusion, I cannot say that the Judge proceeded on an erroneous principle or was plainly wrong."
This is an interesting case, as there are not many cases where it is held that the buyer is entitled to rescind (see further below). It will also be surprising to some that the Standard Conditions did not protect the seller. It shows how important individual facts of each case are in determining whether or not a contractual term will be regarded as fair or not.
See also Area Estates Ltd v Weir  EWCA Civ 801 where it was held that the seller cannot rely on an exclusion clause in relation to a defect in title which he knew about or ought to have known about (see para 21).
Non-reliance clauses and s3
In First Tower Trustees Limited & Intertrust Trustees Limited v CDS (Superstores International) Limited  EWCA Civ 1396 the Court of Appeal gave useful guidance as to when a so called “basis clause” in fact amounts to an exclusion clause and falls within the ambit of section 3 of the Misrepresentation Act 1967.
The Appellants were the landlords of commercial warehouse premises. The Respondent and the Appellants entered into a lease of Bays 1-3 of the warehouse and an agreement for a lease in respect of Bay 4. Unknown to the Respondent but known to the Appellants, the bays were so contaminated with asbestos that they could not be entered.
In pre-contractual enquiries, the Respondent’s solicitor had asked the Appellants’ solicitor about the existence of hazardous substances or environmental problems relating to the bays. The Appellants’ solicitors stated in response that they knew of no such problems but “the buyer must satisfy itself” and confirmed that they would notify the Respondent of anything that may cause their replies to become incorrect.
Shortly before the lease and the agreement for lease were executed, the Appellants’ agents received a report which stated that there was a health and safety risk from asbestos in the bays and that they could not be entered. However, no notification of this report was made to the Respondent before the agreements were entered into.
Clause 5.8 of lease stated: “the tenant 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”.
Clause 12.1 of the agreement for lease stated: “the tenant acknowledge and agree [sic] 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 solicitor’s written enquiries”.
The issue for the Court of Appeal to determine was whether the effect of clause 5.8 of the lease and clause 12.1 of the agreement for the lease operated to absolve the landlord of its liability for failing to disclose the existence of the asbestos in the bays.
The judge held that clause 12.1 of the agreement for lease did not assist, as the representation was made in response to written enquiries. As regards clause 5.8, the issue was whether the clause was a so called “basis” clause which merely set out the basis on which the parties contracted, or whether it was an exclusion clause which fell within the ambit of section 3 of the Misrepresentation Act 1967. The judge held that it was the latter and went on to hold that it did not satisfy the test of reasonableness under section 11(1) of the Unfair Contract Terms Act 1977.
Decision on appeal
The Appellants’ argument on appeal was that the clauses were not exclusion clauses, they were “basis clauses”, i.e. they did no more than delimit the primary obligations of the contracting parties. There is nothing wrong in law, it was said, with parties agreeing to accept a particular state of affairs (e.g. that the contract had not been entered into in reliance on a misrepresentation) even if they know that state of affairs to be untrue: (Springwell Navigation Corp v JP Morgan Chase Bank  EWCA Civ 1221.)
In these sorts of cases, the parties are contractually estopped from denying the basis on which they entered into the relationship.
In particular, the Appellants relied on the case of Thornbridge v Barclays Bank plc  EWHC 3430 (QB), in which it was held that the existence of such a contractual estoppel in relation to pre-contractual representations prevented a contracting party from raising misrepresentation in subsequent proceedings.
Lewison LJ, giving the leading judgment, held that this part of the decision in Thornbridge was wrong. The enquiry does not stop with a finding that there is a contractual estoppel – that is not a complete answer to section 3 of the 1967 Act. Rather, section 3 must be interpreted so as to give effect to its policy – to prevent contracting parties from escaping liability for their misrepresentations unless it is reasonable to do so. Accordingly, clauses which simply state that the contract has not been entered into in reliance on a statement made by or on behalf of the landlord do fall within the ambit of section 3 of the 1967 Act and the reasonableness of the exclusion must be considered.
As to reasonableness, it could not be said that the trial judge had misdirected himself. The test of reasonableness was an evaluative judgment for the trial judge and an appeal court ought to be slow to interfere.
Accordingly, the appeal was dismissed in its entirety.
We have seen that the standard conditions contain a term relating to rescission. It is in the following terms:
"An error or omission only entitles the buyer to rescind the contract:
(a) where it results from fraud or recklessness, or
(b) where he would be obliged, to his prejudice, to accept property differing substantially (in quantity, quality or tenure) from what the error or omission led him to expect."
The fact that the misrepresentation has become part of the contract or that the contract has been performed does not take away the right to rescind (s1 of the Misrepresentation Act 1967)
However, although the contract may allow rescission, this will be subject to s2(2) and (3) of the 1967 Act which allows the court to make an order upholding the contract and to award damages in lieu of rescission:
"(2) Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded, the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of the opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.
(3) Damages may be awarded against a person under subsection (2) of this section whether or not he is liable to damages under subsection (1) thereof, but where he is so liable any award under the said subsection (2) shall be taken into account in assessing his liability under the said subsection (1).”
It can be seen from the highlighted parts that when deciding whether or not to it is equitable to exercise the power to uphold the contract the court will have regard to the nature of the misrepresentation and balance the loss that will be caused to the buyer if the contract is upheld against the loss caused to the seller if the contract is rescinded.
The court's ability to make an order upholding the contract and awarding damages in lieu is demonstrated in the case referred to above, William Sindall plc v Cambridgeshire County Council  EWCA Civ 14. Readers will recall that the council vendors had used the phrase "not so far as the seller is aware" in relation to a question about drains across the land being sold. In fact there were drains present and the Council had not made reasonable enquiries into the matter. There was therefore a misrepresentation that gave rise to liability. However, the existence of the sewer was a minor matter that could be overcome at a cost of £18,000. Since the sale the market had collapsed. Basically, the buyer (the property developer) wanted to get out of the purchase because of the decline in market conditions. If it was allowed to rescind the contract the council would lose about £6m. In fact the right to rescind had been lost but if it had not been, weighing up the factors specified in s2(2) the Court of Appeal held that it would not have been just to rescind the contract. Hoffman LJ:
"If one looks at the matter when Sindall purported to rescind, the loss which would be caused if the contract were upheld was relatively small: the £18,000 it would have cost to divert the sewer, the loss of a plot and interest charges on any consequent delay at the rate of £2,000 a day. If one looks at the matter at the date of trial, the loss would have been nil because the sewer had been diverted.
The third matter to be taken into account under Section 2(2) is the loss which would be caused to Cambridgeshire by rescission. This is the loss of the bargain at the top of the market ... having to return about £8 million in purchase price and interest in exchange for land worth less than £2 million.
Having regard to these matters, and in particular the gross disparity between the loss which would be caused to Sindall by the misrepresentation and the loss which would be caused to Cambridgeshrie by rescission, I would have exercised my discretion to award damages in lieu of rescission."
In the course of the judgment the following comments were also made:
"The discretion conferred by s2(2) [of the 1967 Act] is a broad one, to do what is equitable. But there are three matters to which the court must in particular have regard ..
Damages under s2(2) are .. damages for the misrepresentation as such. What would be the measure of such damages?...
In my view, s2(1) is concerned with the damage flowing from having entered into the contract , while s2(2) is concerned with damage caused by the property not being what it was represented to be."
(See the judgments in the case for fuller discussion of these issues).
Quantum - increase in value of the property
 EWCA Civ 1125
The fact that the buyer had sold the property on at a profit “in the ordinary course of her domestic life” did not affect the level of damages payable in respect of misrepresentations made by the seller to the buyer in replies to pre-contract enquiries. Nor was the buyer required to give credit for a sum received under an NHBC guarantee, which was in the nature of a payment out under an insurance policy.
Facts and argument
A developer seller (S) made certain statements to the buyer of a residential property (B) in the course of replies to pre-contract enquiries. B sued S following completion of her purchase alleging that S had made misrepresentations, in that S had stated that there were no disputes in relation to the property. In fact disputes had arisen concerning the heating system involving defects in a communal biomass boiler. These were being rectified by the NHBC as part of their guarantee at the time the property was sold on by B two years later. At that point B benefited from an increase in the property’s market value.
S argued that as B had sold the property at a profit then S should be able to take advantage of this and the profit B made should be brought into account when considering B’s loss. This was based on the principle that if a step is taken:
“… ‘arising out of the transaction’ which has the effect of diminishing the loss then that reduction should be brought into account if "it formed part of a continuous dealing with the situation in which they found themselves, and was not an independent or disconnected transaction": British Westinghouse Electric and Manufacturing Company Ltd v Underground Electric Railways Company of London Ltd  AC 673”
The Court of Appeal disagreed. Floyd LJ at paras 34 and 38;
"The contention that a wrongdoer should be able to take advantage of a rise in the market value of an apartment when he had induced the purchase by a misrepresentation is, at first sight, rather surprising. It would be natural to suppose that such rise was something with which his wrong has nothing to do. But there is certainly authority, stemming from British Westinghouse, for the proposition that, if the subsequent transaction is all part and parcel of the transaction which gave rise to the wrong, any resulting profit can be brought into account."
However, in the present case that principle did not apply:
"In the present case it is not suggested that Ms Quilter had any obligation to mitigate by re-selling. She needed to live in an apartment with her young son. When the time for buying another property arrived, it arose in the ordinary course of her domestic life rather than being due to the defects in the heating system which were in the course of being repaired. The benefit of the rise in the market value of the apartment should be a benefit she is entitled to retain rather than a benefit for which she should account to the misrepresenting vendor."
The Court also noted that it is well-established that the fact that a claimant has been able to use an insurance policy to reduce or extinguish their loss should not be brought into account, and the same principle should apply to the NHBC guarantee. Floyd LJ at para 39:
"To the extent that the existence of that guarantee brought a benefit (or a potential benefit) to Ms Quilter, it was in any event in the nature of insurance. On well-established principles, the fact that a claimant has been able to use an insurance policy to reduce or extinguish her loss is not to be brought into account, see Bradburn v Great Western Railway (1874) LR 10 Exch 1 and Parry v Cleaver  AC 1 The same principle should apply to the NHBC guarantee which Ms Quilter acquired as part of her contract of purchase."