Exclusion provisions in contracts - how effective are they?

In brief - Exclusion provisions in contracts now less likely to be given effect by courts

Recent decisions of the courts show that they are less likely nowadays to give effect to exclusionary provisions in contract documentation or statements that a party is not liable for the accuracy or omissions from material provided and that the buyer, lessee or other contracting party is entering into the contractual arrangement at its own risk.

These provisions are therefore less of a safety net for developers, lessors and others involved in the property industry than previously thought.

Property transaction documents often contain exclusion provisions

Many contracts, advertising and marketing material and documents issued or distributed in connection with property transactions (for example conditions of tender) contain exclusion provisions or statements that the party receiving the information or documentation relies totally on its own enquiries and investigations.

How effective are these provisions?

If you make representations, you must take responsibility for them

Two recent decisions highlight the fact that many developers, landlords, agents and others involved in the property industry do not pay sufficient attention to the material, representations and statements supplied or made to parties whom they are wishing to induce to enter into a contractual relationship.

Common mechanisms for attempting to avoid liability

The vendors, lessors and others rely upon the following mechanisms to try to avoid liability for statements or assumptions that have been made during a sales or marketing campaign:

• A general disclaimer on marketing and other distributed material.
• A clause that the purchaser relies solely on its own enquiries and has not relied upon anything stated by or on behalf of the vendor or lessor.
• Statements that the material provided to the prospective purchaser or tenant may not constitute all of the relevant material.
• Provisions that the vendor or lessor does not warrant the accuracy or completeness of the material provided.

Two recent decisions (emanating from entirely different areas of the law) show that these general provisions are not effective where the vendor or lessor has been negligent, has deliberately not revealed all of the facts or has been somewhat cavalier with future projections.

Class action by investors in Lehman Brothers securities

The first decision is in the matter of Wingecarribee Shire Council v Lehman Brothers Australia Limited (In Liquidation). This was an effective class action by a number of investors in securities promoted by Lehman Brothers prior to the global financial crisis, where the investors lost substantial money because the securities became almost worthless due to the advent of the GFC.

One of the defences raised by the promoter and the marketers of the relevant scheme was that the material provided contained general disclaimers, one of which was that they had no liability for statements and representations made within the disclosure material.

These disclaimers were held to be ineffective as they were not given appropriate prominence, were not specifically drawn to the attention of the parties to whom the material was given and were ineffective to negate the special relationship that the advisors and promoters had formed with the parties which invested in the promoted schemes.

Statements about new retail development held to be false and misleading

The second decision is in the matter of Miletich v Murchie. This related to a franchisee of a Jamaica Blue coffee shop franchise that was induced to enter into a lease of premises in a new retail development in Melbourne.

The representations as to the number of other tenants that would be trading on the opening of the centre, the services that would be available when the centre opened and the layout of the centre were proven to be false and misleading.

The material provided by the agent and the developer contained disclaimers indicating that nothing in the material was capable of being relied upon by the prospective tenant, that the prospective tenants relied on their own enquiries and that no party preparing or issuing the material had any liability for the statements appearing in the brochures and other marketing material.

Disclaimers in brochures held to be ineffective

The court held that the disclaimers were ineffective. The court stated that regard had to be had to the representations actually made in the brochures and verbally, and that the disclaimer (which was in small print at the end of material, as most disclaimers are) was only part of what the court would take into account.

With regard to the specific statements made in the brochure, the tenant was entitled to rely upon these, the disclaimer was ineffective and substantial damages in excess of $400,000 were awarded to the tenant which eventually had to close the shop due to a lack of trade and therefore a lack of viability of its business.

Position of advantage in negotiations is relevant to the court

Whilst not advocating that general clauses of this nature should not be utilised, developers, marketers, agents and advisers cannot take unreasonable comfort from the existence of disclaimers or provisions that purchasers or tenants solely rely on their own enquiries.

The courts are, more than ever, leaning towards the view that people making statements or representations have to take full responsibility for them, particularly where they are in a better position of ascertaining all of the facts and circumstances relating to a transaction, and more so where they are in a position of dominance or possess greater commercial expertise than the recipient (for example a developer or experienced marketing agent, compared to a relatively inexperienced potential lessee).