Pre-contractual misrepresentation – No escaping reasonableness

Section 3 Misrepresentation Act 1967 provides that a non-consumer contract term seeking to exclude or restrict liability for pre-contractual misrepresentation must be reasonable as per section 11(1) Unfair Contract Terms Act 1977 (consumers have their own protections via the Consumer Rights Act 2015). Various recent decisions have turned on the distinction between exclusion clauses (which must be reasonable) and “basis clauses” – which defined the basis upon which the parties were transacting business, rather than having been inserted as a means of evading liability: cases such as IFE v Goldman Sachs (2007), J.P. Morgan Chase v Springwell Navigation (2008), Thornbridge v Barclays Bank Plc (2015) and the 1st May 2018 judgment in Carney & Others v N.M. Rothschild & Sons Ltd. Basis clauses operate by way of contractual estoppel and are of course standard in investment bank engagement letters. Last week’s CA judgment in First Tower Trustees Ltd v CDS (Superstores International) Ltd accepts the distinction in principle, but emphasises that if in fact there is reliance on a pre-contract misrepresentation, no amount of drafting can stop section 3 applying.  Tortious liability for pre-contract misrepresentation arises independently of the contract, and section 3 cannot be avoided by any amount of “felicity in drafting the contract term”. Of course, in typical commercial contracts where both parties are properly advised and are sophisticated, the usual clause probably will be reasonable; but it will have to pass the test.