Court of Appeal confirms correct legal test for determining a principal’s liability for its agent’s fraudulent misrepresentation

The Court of Appeal has confirmed that, where a claimant has suffered loss in reliance on an agent’s fraud, the principal will be vicariously liable only if the fraudulent conduct was within the agent’s actual or ostensible authority: Winter v Hockley Mint Limited [2018] EWCA Civ 2480.

The court rejected the test applied by the High Court, which was whether it was just and fair for the principal to bear the loss and whether there was a sufficiently close connection between the agent’s wrongdoing and the class of acts he was employed to perform. The correct test is the objective one established by the House of Lords in Armagas Ltd v Mundogas SA [1986] AC 717, which requires a holding out or representation by the principal to the claimant that the agent had the necessary authority, including ostensible authority. This is likely to provide greater certainty as to when a principal will be liable for its agent’s fraud.

However, whilst the Court of Appeal’s decision states that there must be a holding out or representation by the principal, and not merely the agent, the facts which the court thought would (arguably) support a finding of ostensible authority in this case did not involve any direct statement from the principal to the claimant. Instead, they comprised acts such as the provision of an email address and notepaper which might lead the claimant to believe the agent had authority.

Although the Court of Appeal’s comments on the factual matters were obiter (as the case is to be remitted to the High Court for trial), they suggest principals or employers may have ostensible authority, and therefore vicarious liability for an agent’s fraud, even if they do not have direct contact with a potential claimant. To help reduce the risk of liability for a “rogue” agent’s fraudulent conduct, principals and employers should consider carefully what internal procedures may be required to ensure there is sufficient oversight or monitoring of communications or activities carried out by agents.

Jade Hu, an associate in our Dispute Resolution Division, considers the decision further below. Continue reading

High Court finds entire agreement clause did not exclude liability for misrepresentation

The High Court has held that an entire agreement clause in a commercial contract did not exclude liability for misrepresentation under section 2(1) of the Misrepresentation Act 1967: Al-Hawasi v Nottingham Forest Football Club [2018] EWHC 2884 (Ch). The court overturned the master’s decision to the contrary, considered here.

The decision re-emphasises the generally accepted position that clear words are needed to exclude liability for misrepresentation. In general, the effect of an entire agreement statement (of itself) will be to avoid representations becoming contractual terms, rather than excluding liability for misrepresentation. Where a party wishes to avoid liability for misrepresentation, more will be needed, such as non-reliance wording or an express exclusion of liability. Continue reading

Misrepresentation claim struck out on basis that entire agreement statement excluded liability

The High Court has held that an entire agreement clause in a commercial contract had the effect of excluding liability for misrepresentation under section 2(1) of the Misrepresentation Act 1967: NF Football Investments Limited v NFFC Group Holdings Limited [2018] EWHC 1346 (Ch).

This contrasts with the orthodox view that the effect of an entire agreement statement is merely to avoid pre-contractual representations becoming terms of the contract, and that such a statement will not, in itself, exclude liability for misrepresentation (as noted for example in our contract disputes practical guide on pre-contractual statements).

The decision notes that clauses which effectively exclude liability for misrepresentation will ordinarily be expressed using well-established formulations, such as non-reliance wording (see our post earlier on a recent Court of Appeal decision which considered a non-reliance clause) or an express statement that liability is excluded. However, it emphasises that an entire agreement clause (like any other) must be construed in its contractual context. To put it another way, there are no magic words that must be used.

As a practical matter, to avoid any dispute, parties seeking to exclude liability for misrepresentation would be well advised to stick to the well-established formulations – not least as this is a decision of a Master, and there is no guarantee that the same approach will be taken in other cases. It shows, however, that a departure from those formulations need not always be fatal. Continue reading

Court of Appeal finds non-reliance clause sought to exclude liability for misrepresentation and was therefore subject to UCTA reasonableness test

The Court of Appeal has found that a “non-reliance” clause in a lease was a term that excluded or restricted liability for misrepresentation. The clause was therefore within the scope of s.3 of the Misrepresentation Act 1967 (“MA”) and subject to the reasonableness test under s.11(1) of the Unfair Contracts Terms Act 1977 (“UCTA”): First Tower Trustees Ltd v CDS (Superstores International) Limited [2018] EWCA Civ 1396.

Some key points from the Court of Appeal’s analysis include:

  • Where a clause simply delimits the parties’ primary obligations, it is not an exclusion clause and therefore the reasonableness test in UCTA will not apply. Such clauses define the basis on which the parties are contracting. Lewison LJ, who gave the leading judgment, suggested that this is how the label “basis clause” in some of the cases should be understood, though Leggatt LJ, who delivered a concurring judgment, suggested that the term is best avoided in the interests of clarity.
  • A non-reliance clause, in contrast, seeks to prevent liability arising in misrepresentation by stating that no representations have been made or, if made, have not been relied on, and therefore setting up a contractual estoppel. The Court of Appeal held that such a clause amounts to an attempt to exclude liability for misrepresentation. Accordingly, it is subject to s.3 MA and therefore the reasonableness test under s.11 UCTA.
  • Leggatt LJ commented (obiter) that it does not matter whether the non-reliance clause is contained in a contract entered into after the representation was made (as in this case) or before it (eg in a confidentiality agreement entered into before the main transaction). Where it is in a contract agreed before the representation, however, it might affect whether the elements of the misrepresentation claim are in fact established, eg whether a particular communication would reasonably be understood as making a representation or whether it was in fact relied on.

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Court of Appeal clarifies scope of potential liability under the Misrepresentation Act 1967

A recent Court of Appeal decision provides welcome clarity for issuers on the scope of their potential liability under the Misrepresentation Act 1967, and the use of disclaimers to restrict that scope: Taberna Europe CDO II Plc v Selskabet (formerly Roskilde Bank A/S) (In bankruptcy) [2016] EWCA Civ 1262.

The court held that the publication of an investor presentation in a way that actively invites investors to make use of its contents for a purpose other than the presentation’s original purpose could create sufficient proximity to give rise to a duty of care in relation to the content of the presentation. However, potential liability for a misrepresentation in a document can be avoided by a valid disclaimer of liability contained in the same document notwithstanding that the disclaimer itself had no contractual effect (ie was merely a non-contractual notice).

Further, the Court of Appeal (contrary to the first instance decision) determined that section 2(1) of the 1967 Act applies only to a contract which the representee has been induced to enter into directly by the representor, and does not extend to obligations of a contractual nature which the representee acquires from a third party and in respect of which it would have no right of rescission.

For more information, please see our Banking litigation e-bulletin on the decision.

Court of Appeal clarifies approach to ordering rescission for misrepresentation

Where a party has entered into a contract as a result of a misrepresentation, the question often arises as to whether it can unwind, or “rescind”, the contract (eg in a sale of goods contract by returning the goods and getting back the money paid) or whether it is limited to claiming damages, which may not always be as advantageous (and may not be available at all if the misrepresentation was innocent). A recent Court of Appeal decision clarifies the court’s approach: Salt v Stratstone Specialist Limited T/A Stratstone Cadillac Newcastle [2015] EWCA Civ 745.

The court considered two traditional bars to rescission: (i) where the parties cannot be restored to their pre-contract positions; and (ii) delay. On each the court took a flexible approach, emphasising that the question is whether “practical justice” can be done, including by ordering rescission on terms which allow the defendant to be compensated for any unfairness that would otherwise result. The decision may signal a greater willingness to allow claimants to unwind contracts entered into in reliance on a misrepresentation, in order to achieve a just result.

James Norris-Jones and Rebecca Murtha, a partner and senior associate in our disputes team, consider the decision below. Continue reading