E A Grimstead & Son Ltd v McGarrigan

A pre-contractual representation must be construed objectively in its commercial context, including the parties’ knowledge, the transaction structure and the surrounding documents. The court must identify the sense in which the representation was made and understood before deciding whether it was true or false. A representation cannot be construed as excluding one component of a financial equation while including another without cogent evidence. An acknowledgement of non-reliance in a commercial agreement may operate as an evidential estoppel, but the party relying on it must plead and prove the necessary elements. Such clauses may satisfy the statutory requirement of reasonableness where experienced parties of equal bargaining power receive professional advice and deliberately allocate risk through contractual warranties.

The purchaser acquired the shares in J R Bradford & Co Ltd from Frank and Kevin McGarrigan under an agreement dated 13 September 1989. During negotiations, Mr McGarrigan was found to have represented that the company’s assets and liabilities would substantially balance and that its net indebtedness would not exceed £10,000.

The purchaser alleged negligent misrepresentation under section 2(1) of the Misrepresentation Act 1967. His Honour Judge Brunning held that the representations were false, that the statutory defence was unavailable, and awarded damages. The central issues on appeal were the proper construction of the representations, the effect of contractual non-reliance clauses, and the reasonableness of those clauses.

1. Appeal allowed. The judge’s finding that the representations were false could not stand. The representations had to be construed objectively in the circumstances in which they were made, including the parties’ respective knowledge and the terms of the 4 September 1989 fax. The relevant approach was stated in Bankers Trust International plc v P T Dharlmala Sakti Sejahtera [1996] CLC 518.
2. The commercial structure treated the property, stock and goodwill or net current assets as distinct elements of the price. The fax allocated accrued loan interest to the property element and excluded stock from the goodwill element. It was therefore impossible, without cogent evidence, to construe the later representation as excluding stock but including accrued interest. The evidence and surrounding circumstances instead indicated that such an interpretation could not properly be adopted.
3. The conclusion was also supported by the draft accounts, the refusal to give financial warranties and the non-reliance provisions in the agreement. It would have been extraordinary to regard Mr McGarrigan as assuring an improvement of more than £100,000 in the company’s net asset position while refusing the corresponding warranty.
4. The court considered the effect of clauses 2.5 and 8.1. An acknowledgement that the purchaser had not relied on representations other than those recorded in the agreement was capable of operating as an evidential estoppel. The party relying on it had to plead and prove clear and unequivocal terms, an intention that the other party should act on them, and belief in and action upon them, following Lowe v Lombank Ltd [1960] 1 WLR 196. The defence did not plead estoppel, and the court was not prepared to decide that it had been established.
5. Obiter, the court expressed the view that such acknowledgements could be fair and reasonable under section 3 of the Misrepresentation Act 1967 and section 11(1) of the Unfair Contract Terms Act 1977 in a professionally advised commercial transaction between experienced parties of equal bargaining power. Commercial certainty and deliberate allocation of risk through warranties were legitimate considerations.
6. Order: appeal allowed with costs on the standard basis. Leave to appeal was refused. Any extant Mareva order and charging order were discharged.

• Court of Appeal (Civil Division): allowed the appeal from the order of His Honour Judge Brunning made on 7 November 1997.
• High Court, Queen’s Bench Division: awarded the purchaser damages for negligent misrepresentation, together with interest and costs.