Misrepresentations not covered by entire agreement clause

Rix LJ’s judgment in AXA Sun Life Services plc v Campbell Martin Ltd & ors provides an excellent analysis of the law on entire agreement clauses, and in particular, on the wording necessary to exclude liability for prior misrepresentations.

Rix LJ also ruled, albeit obiter, that the widely accepted analysis of Curtis v Chemical & Dying Co [1951] 1 KB 805 CA (which concerns the effect of a misrepresented limitation of liability clause), as contained in Chitty on Contracts, 30th ed, 2008, is incorrect.

The litigation involved claims by AXA Sun Life Services plc (AXA) against four of its appointed insurance representatives, all of whom had entered into agreements with AXA in a standard form provided by AXA. In defence to AXA’s claims, the defendants alleged that, inter alia, they had been induced to enter into the agreements with AXA by negligent and fraudulent misrepresentations and collateral warranties. The defendants further argued that AXA had caused them loss and damage by its breach of implied terms (concerning the manner in which AXA would carry out its business), by its misrepresentations and by breach of its collateral warranties. In response, AXA relied on an entire agreement clause, which was contained in each of the agreements, arguing that it precluded the defendants from claiming for misrepresentation, and breach of collateral warranty and/or implied terms. It is the Court of Appeal’s analysis of this clause which is of interest for the purpose of this Review.

Rix LJ broke the clause down into four parts for analysis:

“(i) This Agreement and the Schedules and documents referred to herein constitute the entire agreement and understanding between you and us in relation to the subject matter thereof. (ii) Without prejudice to any variation as provided in clause 1.1, (iii) this Agreement shall supersede any prior promises, agreements, representations, undertakings or implications whether made orally or in writing between you and us relating to the subject matter of this Agreement (iv) but this will not affect any obligations in any such prior agreement which are expressed to continue after termination.”

Part (i) was a straightforward statement in conventional terms that the contract was the entire agreement between the parties. Part (ii) is a carve-out in favour of any existing formal agreement between the parties, but stating that the contract operates as a variation of that agreement. Part (iv) is a carve-out in favour of prior agreements which are expressed to continue after termination of the contract. Thus parts (i), (ii) and (iv) were all concerned with identifying the parties’ contractual arrangements.

AXA submitted that part (iii) operated to eliminate and/or to exclude liability for misrepresentations, either altogether, or at least so far as misrepresentations as to the terms of the contract are concerned. The Court of Appeal disagreed.

On the wording alone, Rix LJ noted that:

It was this “essence of agreement” that led to the conclusion that the clause was concerned with matters which the parties had agreed, not misrepresentations, and that exclusion of misrepresentation or liability for it was “simply not the business of the clause at all”. The word “representations” (not misrepresentations) was likely in context to refer to representations which might be argued, but for the clause, to have become terms of the agreement. The word “supersede” was also essentially a word of agreement rather than exclusion.

Rix LJ also noted that the surrounding clauses concerning “severability” of “any provision of this Agreement”, and “variations”, requiring writing to effect any “amendment or variation” of the contract were also concerning matters of contractual agreement.

Rix LJ then undertook an analysis of all the key authorities in this area, including the most recent cases of Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd [2008] EWHC 1686 (Comm), [2008] 2 Lloyd’s Rep 581, BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC) and Springwell Navigation Corporation v. JP Morgan Chase Bank [2010] EWCA Civ 1221 in which the Court of Appeal confirmed its decision in Peekay Intermark Ltd v ANZ Banking Group Ltd [2006] EWCA 1551, [2006] 2 Lloyd’s Rep 511, that a clause acknowledging the making of no representations is an effective exclusion of any liability in misrepresentation and that the Lowe v Lombank [1960] 1 WLR 196 (CA) analysis in terms of estoppel rather than contract does not require otherwise. The defendants here accepted that they are bound by Springwell, but reserved their position at Supreme Court level.

Rix LJ concluded that, whilst all cases are only authority for each clause’s particular wording, there were certain “themes” which deserved recognition. In particular:

• exclusion of liability for misrepresentation has to be clearly stated. It can be done by clauses which state the parties’ agreement that there have been no representations made; or that there has been no reliance on any representations; or by an express exclusion of liability for misrepresentation;
• however, save in such contexts, and particularly where the word “representations” takes its place alongside other words expressive of contractual obligation, wording stating the parties’ contract to supersede such prior agreement will not by itself absolve a party from liability for misrepresentation where its ingredients can be proved.

Therefore the AXA entire agreement clause did not exclude liability for misrepresentations of any kind.

Rix LJ remarked that the wording “relating to the subject matter of this Agreement” was not of any assistance. It appeared to be boiler-plate wording. Plainly a representation which has nothing to do with the parties’ agreement at all (such as a misrepresentation about the weather) was “neither here nor there”.

Stanley Burton LJ’s judgment dealt in more detail with the alleged collateral warranties and implied terms. The alleged implied terms were not covered by the entire agreement clause as they would, if proved, be intrinsic provisions of the agreement and therefore fell within part (i), ie “This Agreement and the Schedules and documents referred to therein”. They would also not be “prior” to the agreement. As for the alleged collateral warranties, all parties agreed that these would be covered by the entire agreement clause because they were prior “promises”.

UCTA and s3 Misrepresentation Act 1967

Section 3 UCTA applies to a party’s standard terms of business. As the entire agreement clause prevented any collateral contract or warranty coming into existence, it was not subject to s3(2)(a) UCTA, which covered exclusions of liability for breach of the same contract. However, s3(2)(b) covers exclusions for performance which is substantially or totally different to that which was reasonably expected of a party. This could apply, in appropriate circumstances to a pre-contractual representation or promise that may affect the performance that was reasonably expected, provided that it was possible to identify both the performance that was reasonably expected and that defined by the contract.

Therefore an entire agreement clause, whilst not the type of exemption clause with which UCTA is principally concerned, may be subject to the reasonableness test in UCTA. Section 3 Misrepresentation Act also imports a requirement of reasonableness, even where the parties have agreed, in an entire agreement clause, that there have been no misrepresentations.

The reasonableness test was satisfied. All defendants were financial advisors accustomed to dealing with written agreements. They could have been expected to read the contracts, in which the clauses were clearly marked. The provisions were not unusual in the insurance industry.

Curtis v Chemical and Dyeing Co

Rix LJ noted that this case is often cited, for instance in Chitty on Contracts, 30th ed, 2008, for the proposition that a misrepresentation as to the effect of an exemption clause inserted by the representor into his contract will prevent the representor from relying on that clause. However, this was not the correct analysis.

Obiter, Rix LJ held that the proper interpretation of this case is that, where the effect of an exemption clause is misrepresented, the exemption clause never becomes part of the contract between the parties as it has not been brought sufficiently to the parties’ attention.

Comment: Entire agreement clauses are an important device in commercial contracts that serve to ensure that the parties’ agreement is all contained in the written contract. When a dispute arises, a party may try to rely on statements made during negotiations for the contract, alleging that such statements were untrue and induced the party to enter into the contract. This case confirms that, in order to exclude misrepresentation or liability for misrepresentations, explicit wording is necessary. Whilst this is not new law, it does remind us that this can be done using wording which states that no representations have been made, or that there has been no reliance on any representations, or by an express exclusion of liability for misrepresentation. Unless this type of wording is present, it will be very difficult to persuade a court that misrepresentations are caught. Note that entire agreement clauses can be caught by UCTA.

It is also worth reflecting on the difference between an alleged collateral warranty and a misrepresentation. The distinction is important because a clause that is ineffective to exclude liability for misrepresentation may be effective to exclude what would otherwise be a collateral warranty. A misrepresentation is an untrue statement of fact or law made by party A (or his agent for the purposes of passing on the representation, acting within the scope of his authority) to party B which induces party B to enter the contract thereby causing loss. A collateral warranty is a promise, often verbal, which is:

• intended to be binding;
• connected to another, principal contract; and
• which persuades the other person to sign the main contract.

A promise can only be treated as a representation of fact if the maker has no intention of fulfilling the promise when it was made, in which case it becomes a fraudulent misrepresentation.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.