Most readers will have negotiated a contract against a deadline. Only at the last moment do we find all the key people in the same room at the same time focusing on whatever is holding up the deal. In my scenario, the contract has been prepared for signature but the contractor is concerned because of the short tender period and the fact that it has not had time to do a proper site survey. Desperate to get the contract signed, the employer's agent says that from the borehole information, there is no chance of meeting running sand in the ground – the contractor's particular concern. Months later the site seems to consist of nothing but running sand.
Where does our contractor stand? It reaches for the standard form contract to find that among many amendments is the addition of an "entire agreement" clause, which says that the contract document constitutes the entire agreement between the parties and supersedes anything said in negotiations. The clause also contains an acknowledgment by the contractor that it has not relied on any representation or warranty except as expressly set out in the agreement.
It all looks a bit bleak for the contractor. Of course, if it can prove that the agent fraudulently misrepresented the position, it will have a reasonable claim – for, as Lord Loreburn said in 1907, "nobody can escape liability for his own fraudulent statements by inserting in a contract a clause that the other party shall not rely on them". But that is not very likely – it is more likely that the agent was simply careless or negligent. So the written contract seems to preclude a claim.
Parties should include in their contract any material they regard as relevant to the risk being undertaken
The Court of Appeal has recently been looking at ways of dealing with this situation. Its approach is that the entire agreement clause does not exclude or limit liability and therefore is not subject to the reasonableness test imposed by the Misrepresentation Act. The written acknowledgment of non-reliance given by the contractor would therefore prevent it from arguing that it did rely on what the agent said – unless the agent knew that its words were being relied on. If that was true – as it was in my scenario – and could be proved, the entire agreement clause would not defeat the contractor's claim: the written acknowledgment of non-reliance would fall away, allowing justice to be done.
The alternative way of looking at this problem is shown by the Queen's Bench judge in the case of Zanzibar vs British Aerospace. There, the judge took the commonsense approach that the clause was an attempt to exclude a liability that would otherwise exist, so the court would have to look at all the circumstances of the transaction to consider whether it was a reasonable exclusion. An inquiry would address what the agent was thinking at the time and whether it was aware that the other party would rely on its statement. It would also consider whether it was reasonable for the contractor to rely on what was said.
In Grimstead vs McGarrigan (1999), the Court of Appeal considered what would happen if, contrary to its view, the Misrepresentation Act did apply. Would it pass the reasonableness test? Yes, said the court, it would. The parties were looking for certainty and had been advised by solicitors, so they should be held to their contract. Furthermore, the price would be set by reference to the risks each was undertaking, and the entire agreement clause helped to define that risk.
Tony Blackler is a partner in solicitor Macfarlanes.