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FEATURE |
Effective Use of Non-reliance Clauses: Satisfying Lowe v Lombank
The inclusion in contracts of “non-reliance” clauses, as a means of pre-empting assertions of misrepresentation, has become commonplace. The validity and effectiveness of such clauses is another matter. This article discusses how a non-reliance clause may act as an evidential estoppel.
It is becoming standard practice to include in a contract, a clause which seeks to take away a party’s right to allege that he (or she) was induced to enter into the contract by a misrepresentation. Such a clause, commonly referred to as a non-reliance clause or “no reliance” clause, usually makes several acknowledgments as between the contracting parties, including declarations of the absence of representations, the absence of authority to make representations, and the absence of reliance or inducement.
While it may be easy to insert such a clause in the contract, as where the relative bargaining power is uneven, the validity and effectiveness of such a clause is another matter. Previously, much of the contention was on whether such a clause is an attempt to exclude liability for misrepresentation and whether it satisfies the reasonableness test.1 In recent times, the focus has shifted to the issue of whether a non-reliance clause acts as an evidential estoppel, preventing a contracting party from asserting that he was induced by the other party’s misrepresentation. In this article, we consider how a non-reliance clause may be drafted and used in a manner countenanced by the law.
First, let us take a look at the law. According to Diplock J (as he then was) in Lowe v Lombank,2 estoppel by representation operates if:
1. there was a clear and unambiguous statement (or representation);
2. the maker of the statement intended it to be acted upon by the recipient or, at least, the maker so conducted himself that a reasonable man in the position of the recipient would take the representation to be true and believe that it was meant that he should act upon it; and
3. the recipient believed the statement to be true and acted upon it.
In the case itself, the issue was whether acknowledgements in a hire-purchase agreement and in the delivery receipt by a car buyer that she had examined it and found it in good order estopped her from asserting that she had been induced by misrepresentations made by the salesman. Justice Diplock found, on the facts, that none of the three requirements mentioned above were satisfied, commenting:
[t]o call it an agreement as well as an acknowledgement … cannot convert a statement as to past facts known by both parties to be untrue into a contractual obligation … .3
Diplock J’s three requirements have been endorsed and applied in numerous settings and cases, including the English Court of Appeal decisions in Grimstead v McGarrigan,4 Watford Electronics v Sanderson5 and Peekay Intermark v ANZ Banking (“Peekay”).6 It was also applied by the English High Court recently in JP Morgan Chase v Springwell (“Springwell”),7 which involved a massive claim8 of US$290m for bad financial advice,9 and by Judge Richard Seymour QC in Peart Stevenson Associates v Holland (“Peart Stevenson”),10 a case involving a franchise dispute.
In Singapore, Lowe v Lombank as well as Peekay were cited and, it would appear, endorsed by the Court of Appeal in Orient Centre Investments v Societe Generale.11 Peekay was also cited by Justice Lee Seiu Kin in Jurong Shipyard v BNP Paribas.12
It should be mentioned that apart from estoppel by representation, another species of estoppel – “contractual estoppel” – is currently being propounded as being applicable to non-reliance clauses as well.13 However, the proposed doctrine, which appears to have the single requirement that there must be a clear and unambiguous statement, lacks juristic basis and is probably misconceived.14
We turn now to estoppel by representation and consider how one might draft and use non-reliance clauses in a way that would make available the estoppel doctrine.
As mentioned earlier, if B wishes to estop A from asserting that A was induced by a representation made by B (or his agent), B must first show that the statements in the non-reliance clause are clear and unambiguous. This requirement is relatively easy to satisfy. The drafter of the clause should take care to phrase clearly the various matters sought to be established, including:
1. the absence of any representation by B or B’s employees or agents;
2. the absence or lack of authority on the part of B’s employees or agents to make any representation;
3. the non-reliance by A on any representation by B or B’s employees or agents; and
4. the dependence of A upon his own enquiries, independent advice and decision-making.15
Different declaratory words have been used for this purpose, including “acknowledges”, “confirms”, “declares”, “represents”, “agrees” and ”gives notice”. From the cases, it would appear that all of these terms achieve the desired effect.
While in some cases, the clause is phrased as a statement from one party to the other party, in others it is phrased as something that both agree upon. Again, it appears that either format is acceptable and achieves the same result. However, if one wishes to err on the side of caution, the more established format, and one which appears more consonant with the concept of estoppel, is an acknowledgment made by one party to the other.
The second requirement is more complicated. According to Diplock J, A must either have intended the statement to be acted upon, or so conducted himself that a reasonable man in B’s position would act upon it. Here, we encounter difficulties.
The instinctive question is: whose document is it in the first place? Where the final agreement is one arrived at after negotiations and revisions, it is apt to say that each party intended the other to rely on clauses contained in the agreement. In contrast, where the agreement is a standard form proffered by B and signed by A without awareness of the non-reliance clause, there is difficulty in arguing that A intended the clause to be relied upon since intention requires knowledge.
Even if A had read the clause, there is the further question of whether he understood or appreciated its implications. Here, the merits as between the parties are quite evenly balanced. While there is no direct authority16 on this point, it seems likely that the courts would incline to the position that where A did not understand the implication of the clause, he is not to be regarded as having intended the clause to be acted upon by B.
The alternative limb of the requirement – that A so conducted himself that a reasonable man in B’s position would act upon it – involves similar considerations. If the agreement was prepared by A, the requirement is easily satisfied. If the agreement was prepared by B, the question is whether A’s appending his signature to the agreement, without any indication (other than the act of signing) of his awareness and understanding of the clause, satisfies the requirement.
In Lowe v Lombank, it was held that the plaintiff was not to be regarded as having intended the clause to be relied upon by the defendant by the plaintiff’s signing of the delivery receipt. Alluding to and agreeing with this holding, Judge Seymour in Peart Stevenson explained:17
What is needed, in order to make out the second requirement, is the demonstration of a conscious intention to make the statements … or to have conducted oneself in such a way as to lead a reasonable person to conclude that there was such a conscious intention. Signing a standard form of agreement prepared by the party seeking to rely on the statements, which are buried within 34 pages of text, does not … either in itself show the requisite intention or amount to [such] conduct … . (Emphasis added).
In contrast, in Springwell, Gloster J held, without elaboration, that:
By signing the various documents, Springwell so conducted itself that a reasonable person in the position of Chase would take the representation to be true and believe that Springwell intended that Chase would act upon it.18
The balance of authorities suggests that signing a standard form doument, of itself, does not show the profferee’s intention to induce or amount to conduct that would induce the profferer. Thus, to enhance the likelihood of the requirement being satisfied, the profferrer may have to take steps such as drawing the profferee’s attention to the non-reliance clause, explaining its import to him, and perhaps even getting him to initial against the clause.19
The third element – that B believed the statement to be true and acted upon it – may pose the greatest difficulty. Let us consider its application to non-agency situations and agency situations respectively.
Where B had made a representation to A, then the assertion that there had been no representation is simply not true, and B cannot have believed in it. But can B nevertheless avail himself of the non-reliance part20 of the clause and argue that B believed that A did not rely on the representation? The answer depends on the nature or quality of belief required in the third requirement in Lowe v Lombank. More specifically, is it sufficient that B honestly believed in the truth of the statement or must his belief be reasonable as well? Whilst case authority provides no definitive indication, it seems likely that the belief needs to be reasonably held.
Applying the reasonable belief measure, much turns on B’s perception of A’s frame of mind. If B had drawn A’s attention to the non-reliance clause and explained its effect, then it may be reasonable for B to believe that A was not induced by the representation. In contrast, where B chose to remain silent while A signed in circumstances which did not give any indication of his awareness of the clause, B would have an uphill task convincing the court that he believed in the truth of the clause.
It is also worth noting that in situations where representations have been or may have been made, it is preferable that the clause reflects that fact or possibility. For example, the clause could read:
A acknowledges that while representations have been or may have been made by B prior to entering into this Agreement, A does not rely on any of the representations but instead has made independent inquiries on the matters represented and has made his own decision in entering into this Agreement.21
Such a clause has the advantage of being consistent with the picture that B is painting as he seeks to invoke estoppel. It also avoids the possibility of the whole clause failing on account that an untrue part of it cannot be severed.
Where the representation was made by B’s employee or agent (C), the position gets complicated. The possible fact scenarios include:
1a) B prohibited C from making representations (or some specific representations) and is not aware that any such representation has been made;
1b) B prohibited C from making representations but is aware that representations have nevertheless been made; and
1c) B prohibited C from making representations but suspects or ought to know that C has made representations; or
2a) B did not prohibit C from making representations and is not aware that any such representation has been made;
2b) B did not prohibit C from making representations and is aware that representations have been made; and
2c) B did not prohibit C from making representations and suspects or ought to know that C has made representations.
(It is assumed, in all the scenarios, that the agreement contains all the relevant sub-clauses, including the no-authority sub-clause.)
The question in each of the above scenarios is, whether in the circumstances, B believed in the truth of the relevant statements in the non-reliance clause. As discussed above, reasonable belief is probably the standard to apply.
In scenario 1a, B appears to be without fault and should be able to prove that he believed the various facts asserted – no representation, no authority, no reliance and A’s independent decision. Scenario 2a, despite the difference that B had instructed C not to make representations, is quite similar to scenario 1a; B is not aware of any representation being made, and should have reasonable belief (though not as compelling as in 1a) in the truth of statements in the non-reliance clause.
In scenario 1b, B knows that the no-representation assertion is not true; he does not believe it to be true. But, as in the non-agency scenario, the enquiry does not end there. B may argue that even though he knew there had been a representation, he believed, as is narrated in the non-reliance clause, at the time of the contract that A was not relying on the representations and in fact was making his own decision in entering the contract. The question then is whether a reasonable man in B’s position would have believed that A was not relying on C’s representation. The answer appears to be that unless B had taken reasonable steps (such as through enquiry, verification and explanation in a meeting before the signing of the agreement) to ascertain that A was not relying on C’s representations, B did not believe that A was not relying. If B had taken the reasonable steps, then he would be justified in his assertion that he believed that A was not relying (and indeed, the impact of C’s representations would have been removed). A similar and more compelling conclusion can be drawn in scenario 2b.
Scenario 1c, where B suspects or ought to know that representations have been made, is more difficult as there is a lesser degree of culpability on B’s part. However, upon analysis, the position is probably the same as in 1b. The reason is that a reasonable man in B’s position would not, in such circumstances, simply believe that there was no reliance; he would go further and takes steps to ascertain as a matter of fact that A was not relying. Therefore, unless B had taken these steps, he would fail in his attempt to establish his belief in the truth of the non-reliance clause. Again, a similar conclusion can be drawn in scenario 2c.
Estoppel by representation is a useful tool for preventing a contracting party from alleging misrepresentation. However, the requirements for its availability may not be so easily satisfied, especially in the common scenario where the party seeking to plead estoppel on the basis of the non-reliance clause is the profferer of the document and the profferee had signed without awareness or understanding of the non-reliance clause. In such a situation, the task of establishing that the profferee intended to induce the profferer and the profferer believed in the truth of the statements in the non-reliance clause may prove to be insurmountable. It would be advisable for the profferrer to take reasonable steps to ensure the profferee knows and understands the non-reliance clause, and is indeed not induced by representations which the profferer knows or suspects have been made. Otherwise, no matter how copiously or carefully the non-reliance clause may have been crafted, it may not be effective to raise an estoppel.
Associate Professor Low Kee Yang*
School of Law,
Singapore Management University
E-mail: kylow@smu.edu.sg
* The helpful discussions with colleague, Professor George Wei, are gratefully acknowledged; all inadequacies are mine alone.
1 See Treitel, The Law of Contract, (12th ed, 2007), paras 9-113 et seq; Chitty on Contracts, (30th ed, gen ed Beale, 2008) Vol I, paras 6-134 et seq.
2 Lowe v Lombank [1960] 1 All ER 611 at 616.
3 At [615].
4 [1999] Westlaw 852482.
5 [2001] EWCA Civ 317.
6 [2006] EWCA Civ 386.
7 [2008] EWHC 1186 (Comm) 2001 – 404 (transcript).
8 A second claim was for profits foregone by the inability to carry out a business proposal as a result of the losses suffered because of the poor financial advice.
9 Leave to appeal to the Court of Appeal was given on 16 June 2009: [2009] EWCA Civ 716.
10 [2008] EWHC 1868 (QB), HQ07X03235 (transcript).
11 [2007] 3 SLR 566 at [44] and [51-53] respectively. Although Chief Justice Chan Sek Keong did not elaborate on how the three requirements of Lowe v Lombank were satisfied on the facts, the learned judge was of the view that, in the face of the many clauses in various documents, the appellants could not argue that they relied on the representations of the respondent’s employees. Further, he thought that they could not have misunderstood the clear terms of the financial products in question.
12 [2008] SGHC 86.
13 The suggestion was first made by Moore-Bick LJ (and echoed by Chadwick LJ) in Peekay and was subsequently applied by Gloster J in Springwell and by Aikens J in Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd [2008] EWHC 1686 (Comm) 2008 –126 (transcript).
14 It is not surprising that contractual estoppel is not recognised as a species of estoppel in the established works on the subject: see Spencer Bower, The Law Relating to Estoppel by Representation, (4th ed, edited by Feltham, Hochberg & Leech, LexisNexis, 2004); KR Handley, Estoppel by Conduct & Election (Sweet & Maxwell, 2006) and Wilken & Villiers’ The Law of Waiver, Variation & Estoppel, (OUP, 2002).
The term contractual estoppel was in fact referred to by Lee Seiu Kin J in Jurong Shipyard v BNP Paribas [2008] SGHC 86; however, he held at [100] and [104] respectively that estoppel does not apply where there had been vitiating factors such as duress, undue influence and misrepresentation.
15 In financial advice contracts, a sub-clause declaring A’s knowledge and understanding of the nature and risks of the transaction he is entering into is usually included.
16 In Lowe, Diplock J observed (at [615]) that the clause “was never brought to the notice of the plaintiff and its effect was not made clear to her” and it would appear that he took these facts into account. In Peart Stevenson, Judge Seymour noted (at [106]) that the defendant knew of the non-reliance clause but nevertheless found (at [108]) that the second requirement was not satisfied.
17 At [108].
18 At [568]. Similarly, in Quest 4 Finance v Maxfield [2007] EWHC 2313 (QB), HQ 0603191 (transcript), Teare J found that by signing a “Warranty” document which contained a declaration of non-reliance, the signor intended the declaration to be acted upon (see para 37 of judgment).
19 Such steps of course run the risk of being met with remonstration from A, in which case the document may not get signed, and the intended effect of the clause will not be achieved.
20 Either alone or together with the sub-clause on independent decision.
21 Similarly, in agency scenarios, the clause should reflect the fact or possibility of representations having been made by B’s agents.