Sheriff Appeal Court allows homeowners’ action for reduction and damages against sellers over ‘misrepresentation’ to proceed to proof

The Sheriff Appeal Court upheld a decision of the sheriff that clause 27 of the Scottish Standard Clauses did not preclude an action of reduction based on an alleged misrepresentation made prior to the conclusion of missives, and that a clause on awareness of circumstances affecting the property did require the sellers to disclose any flooding within the previous five of which they were aware.

‘Negligent misrepresentation’

Sheriff Principal Mhairi Stephen QC, sitting with Sheriff Principal Marysia Lewis and Appeal Sheriff Peter Braid, heard that the pursuers Shahzad Anwar and Aisha Anwar brought an action against the defenders David Britton and Linda Barclay for reduction of missives of sale and a subsequent disposition of heritable property in Strathblane, seeking repetition of the purchase price and damages, on the basis of “negligent misrepresentation” or alternatively “innocent misrepresentation” as to whether or not the subject were affected by flooding.

The court was told that on 24 May 2016 a formal written offer to purchase was submitted on behalf of the pursuers, which incorporated the standard clauses and was conditional upon, among other things, a flood risk report in satisfactory terms being obtained.

The pursuers averred that the issue of flooding was important to them and that they made the defenders aware of their intentions regarding development of the property.

A flood risk report classified the risk as low, but recommended that the pursuers speak to the sellers to confirm whether the property or surrounding area had flooded before.

By email dated 14 July 2016 the defenders’ solicitors confirmed that the defenders had no experience of flooding at the subjects and the missives were concluded on 3 August 2016.

However, the pursuers claimed that they subsequently discovered that in November 2015 the stream which passed through the subjects had overflowed and that the first defender, at least, was aware of flooding in the garden “from time to time”.

‘Proof before answer’

Following a debate on the parties’ preliminary pleas, the sheriff at Falkirk decided the first two main issues in favour of the pursuers and allowed a proof before answer.

He determined, first, that clause 27, properly construed, did not exclude reliance on a misrepresentation which pre-dated the contract and, accordingly, that the pursuers’ averments regarding the email of 14 July 2016 were relevant and, second, that clause 2.1.3 should be read as warranting that the property “has not been affected by flooding from any river or water course which has taken place within the last five years”.

On the third issue - whether an action for reduction can be founded upon a representation which has been incorporated into the contract as a term of that contract - the defenders’ position was that if the sheriff found against them on the construction of clause 27, the point became academic and was not insisted upon.

As the sheriff did find against the defenders on the meaning of that clause, he therefore did not require to reach any decision on the third issue.

But he did express the view that if he was wrong as to the meaning of the clause, reduction was not necessarily barred simply because the representation was embodied in a term of the contract, in circumstances where the clause was introduced at a stage prior to the conclusion of the missives.

‘Correct interpretation’

The defenders appealed against all three aspects of the sheriff’s decision, but the appeal sheriffs ruled that the sheriff’s decision was correct.

In relation to whether clause 27 prevented the pursuers from founding on the email of 14 July 2016, which predated the conclusion of missives, the court held that, having regard to the principles of contractual interpretation, it was “hard to see that the natural and ordinary meaning of the words used is that contended for by the defenders”.

Delivering the opinion of the court, Sheriff Principal Stephen said: “Reading the clause as a whole, it appears to be conveying one message rather than two, as signified by the absence of a comma or any other separator between the opening phrase – ‘The Missives will constitute the entire agreement and understanding between the Purchaser and the Seller with respect to all matters to which they refer’ – and the rest of the sentence.

“Second, the natural and ordinary meaning of the words used is not that the parties are giving up the right to rely on any misrepresentations which may have been made. In particular, the words ‘supersede’ and ‘invalidate’ do not sit happily with such an interpretation.

“As counsel for the pursuers submitted, those words convey the meaning that the parties agree that something which otherwise would have had legal effect should not have that effect, rather than an intention to surrender a potential legal remedy which would otherwise be available in respect of a wrong which may have been committed.

“The natural and ordinary meaning of the words, therefore, points towards the construction contended for by the pursuers.

“Accordingly, we consider that the sherif was correct in interpreting clause 27.1 as he did.”

‘Commercial common sense’

As to whether clause 2.1.3 amounted to a warranty only as to the current condition of the property and no more, as the defenders contended, or whether it amounted to a warranty as to the defenders’ knowledge of any history of flooding at the property, within the last five years, which the pursuers’ contended made “commercial common sense”, the court observed that the defenders’ position gave rise to “uncertainty”.

“Conversely,” Sheriff Principal Stephen said, “the pursuers’ interpretation not only makes sense but is easy for a seller to comply with. All they need to do is disclose any flooding which, to their knowledge, has occurred within the last five years.

“Whether it was big or small makes no difference. The risk will then be a matter for the purchaser to take an informed decision on.

“We therefore consider that the draftsman intended that clause 2.1.3 should have the meaning contended for by the pursuers, and that the sheriff was correct in so holding.”

The remaining ground of appeal related to the issue of whether, in the event that clause 2.1.3 had the meaning contended for by the pursuers, and the defenders were aware of flooding within the last five years which had not been disclosed, the pursuers were entitled to regard that not only as a breach of contract but also as a misrepresentation which entitled them to the remedies of reduction of the contract and to repetition of the purchase price (and, perhaps, damages).

The court considered that there was “no reason in principle why that should not be the case”.

“If the missives constitute the entire agreement and understanding and supersedes all prior representations,” Sheriff Principal Stephen added, “it must follow that it is open to a party to insist that a pre-contractual representation upon which he has relied should become a term of the contract. It does not follow from the fact that the contract duly contains that term that the party has ceased to rely upon the representation.

“To give an example, if A represents to B that his car has done only 5,000 miles, and on that basis B agrees to purchase the car, and the parties subsequently contract for the purchase and sale of a car which has done 5,000 but it transpires that the car has in fact done 50,000 miles, we see no reason why that could not give rise to either a claim for breach of contract or a claim based upon misrepresentation. There are many situations where the same facts give rise to a choice of remedies.

“Of course, in relation to many contractual terms, in particular those which give rise to an obligation on a party to do something, the question will simply not arise. But in relation to terms which warrant a particular state of affairs, such as in clause 2.1.3, we can see no reason, in principle, why the pursuers might not have a choice of remedy, if the warranty turns out to be false, as they aver.”