Entire agreement clauses intend to restrict all potential liability that can arise from an agreement to the terms of the contract itself. This means that any collateral statements made during the negotiation of an agreement should become irrelevant. And that, if in dispute, the parties should look only to the contractual terms (entire agreement) for relief. Such clauses have become standardised boilerplate clauses found in most contracts. They are subject to caveats and in some instances complex ongoing legal debate. This blog intends to give a practical view of the effectiveness of such clauses by using example cases to illustrate various points.
Contents of entire agreement clauses
Typical entire agreement clauses include several different elements:
- A statement agreeing that all the terms of a contract/agreement are to be found in this document.
- Exclusion of liability for misrepresentation in the form of a non-reliance statement, an express exclusion of liability and a restriction of remedies. This is where the law gets complex.
- An acknowledgement that there is no intention of restricting liability for fraudulently made statements – such limitation would be unlawful. Case law indicates that such a clause is irrelevant given its unlawfulness. Yet it still appears in most boilerplate entire agreement clauses.
Entire agreement clauses statement
What happened? Tenants of a pub had entered into an agreement in which, as part of their tenancy, they would be supplied beer by their landlord. Their landlord was subject to an investigation in 1900 that ended with the landlord making a commitment to release any tenants from such an arrangement in 1996. The tenant relied on this and went to a different supplier.
Judgement: The landlord’s pointed to a clause in the original agreement which stated that subject to any later variation to it agreed in writing between the parties, the lease “constitutes the entire agreement between the parties”. This meant that the tenant’s reliance upon the 1900 investigation, occurring outside the agreement, was unlawful and the tenants were injuncted from going to other suppliers.
Lesson: The entire agreement clause allowed the landlord to successfully argue that events occurring outside of the contract could not be relied upon to alter the lease. No collateral contract between the landlord and tenant, regarding who should supply beer, had been created by the 1900 investigation because the entire agreement clause clearly stated that all the terms of their agreement lay within the lease’s original contract (unless such lease was later varied by agreement in writing which had not been the case).
As the judge Lightman J stated: ‘such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that, accordingly, any promises or assurances made in the course of negotiations (which in the absence of such a clause, might have effect as a collateral warranty) shall have no contractual force, save in so far as they are reflected and given effect in that document’.
Prior written agreements can be defeated
What happened? Two agreements were essential to the dispute. One was an options agreement and the other a shipbuilding agreement. The options agreement allowed Ravennavi to ask New Century to build two oil tankers. Once this option had been exercised, the shipbuilding agreements would be triggered and entered into by the parties. The initial options agreement contained a clause which required New Century to build the ships early if it had capacity to do so. The shipbuilding agreements did not include such provisions. A dispute arose when Ravennavi became aware that New Century had agreed to build oil tankers for another client before delivering for Ravennavi. The shipbuilding agreements (triggered by the options agreement and therefore entered into after the options agreement) included the following short-form entire agreement clause:
“This contract contains the entire agreement and understanding between the parties hereto and supersedes all prior negotiations, representations, undertakings and agreements on any subject matter of this contract prior to the signing of the contract”
Judgement: New Century successfully argued that the short-form entire agreement clause in the shipbuilding agreements overruled the options agreement and therefore New Century’s obligation to put Ravennavi to the front of their production queue was invalid.
Lesson: The case shows that short-form entire agreement clauses can potentially defeat not just representations made during the course of negotiations (a representation meaning a statement made to induce another party into an agreement), but also an existing formal written agreement, in this case the options agreement which triggered the shipbuilding agreements.
Misrepresentation not always excluded
During negotiations of a share purchase agreement, the buyer of Nottingham Forest Football was led to believe that the clubs liabilities stood at £6.5 million when in fact they were £10 million. The buyer therefore wanted to claim against the seller for misrepresentation of the amount of debt which convinced the buyer to enter the agreement. The entire agreement provision in this case read as follows:
“The agreement (together with the documents referred to in it) constitutes the entire agreement between the parties and supersedes and extinguishes all previous discussions, correspondence, negotiations, drafts, agreements, promises, assurances, warranties, representations and understandings between them, whether written or oral, relating to its subject matter.”
Judgement: Initially it was found that the clause in question did defeat an action for misrepresentation i.e. the buyer could not sue the seller for misrepresenting the bargain being entered into due to the entire agreement clause. However, on appeal it was found that the clause did not have the effect of defeating the buyer’s claim. This was largely based on a former ruling in AXA Sun Life Services Plc v Campbell Martin Ltd  EXCA Civ 133 which stated that it would be assumed, without clear wording, that entire agreement clauses excluding liability for misrepresentation would be referring to representations of a contractual nature such as those referring to a contractual term, collateral agreement or warranty. Therefore, pre-contractual statements, such as the liability of the football club in this case, could still be relied upon by the buyer because it was not of a ‘contractual nature’.
Lesson: If you have entered into an agreement based upon statements made by the other party then you should include these in your written agreement so you can rely on future liability for such statements. If you want to exclude liability for misrepresentation, then you should have clear wording stating so. This was a failure on the part of the seller in this case as no statement of non-reliance on misrepresentations was included. Such non-reliance clauses are usually included in entire agreement clauses. However, this will still not necessarily exclude liability for misrepresentations, as such exclusion will still have to be deemed reasonable by the courts under the Unfair Contract Terms Act 1977 (UCTA). It should also be noted that the clause in this case did not refer to misrepresentations, only representations, and this was another successful argument made by the buyer’s lawyers.
Reasonable entire agreement clause?
If looking to exclude liability for misrepresentation under an entire agreement clause then it will have to be deemed reasonable by the standards of the UCTA. This question is highly fact-sensitive and therefore comparison with other cases may be of limited value. What seems to be important, however, is whether the parties are of equal bargaining power, having taken professional advice and that the contract has been actively negotiated by the parties.
Where the courts are less likely to find such an entire agreement clause unreasonable is when one side has far more business experience than the other, the truth or falseness of representations are better known by one party, when statements have been made to induce the other party into reaching an agreement and where the statements were then in fact relied upon. The vagueness of these possible lines of argument is further testament to the fact-sensitive nature of such judgements. A well drafted non-reliance clause will still be of significant effect when trying to remove liability for misrepresentation.
Here to help
Given that an entire agreement clause is a standardised boilerplate clause, it is interesting to note how significant a role it can play if the parties to a contract fall into dispute. Its effectiveness is in many ways a reflection of a wider trend and tradition in English law – that a written document contains all the terms of a contract and contractual certainty is the bedrock of free commerce. When parties look to rely upon such a clause unreasonably, however, it can be struck down and wording needs to be specific, especially when limiting liability for misrepresentation. Not everything can be boiled down to the contract but by comparison to EU law, where concepts beyond contractual terms, such as good faith, are readily applied to all contractual relationships, the literal interpretation of entire agreement clauses by UK courts is in many ways a national bias.
EM law specialises in contract law. Get in touch if you need advice on entire agreement clauses or have any questions on the above.