entire agreement clauses in business contracts (exclusion of claims)

Purpose of Entire Agreement Clauses

Entire agreement clauses are sometimes also referred to as “Whole Agreement” clauses.

They’re incorporated into business contracts to establish a position to ensure that previous agreements and arrangements between the parties are discharged, and have no legal effect.

Entire agreement clauses do this by providing that the agreement between the parties is limited to the terms and conditions contained in the contractual documentation, and nothing else.

They’re generally designed – or intended - to increase certainty of the terms of contract agreed between the parties.

They’re intended to do so by:

• nullifying legal causes of action.
• limiting the contract to the words in the contract, and no more.

They have a fatal effect on legal claims when they are effective.

 

Background to the Contract

The background to a contract may involve a series of events which could form the basis of a legal claim down the line, such as:

• heads of terms or letters of intent
• documents signed by the parties
• documents referred to in letters and emails
• oral statements.

An entire agreement clause provides that the agreement is limited to material referred to in the contract and excludes material which is not referred to, thus excluding prior:

• contracts
• informal or formal arrangements
• understandings, and
• methods or practices which at law would form a contract

If there are pre-existing contracts that are intended to remain in force at the time of the new agreement, using them can be quite dangerous.

Pre-contractual representations made by one party to the other to induce them to enter into a contract, are excluded by another type of clause, the non-reliance clause.

Entire agreement clauses and non-reliance clauses are typically used together to wipe the legal slate clean as at the date to new contract is agreed.

 

But are they effective?

Entire agreement clauses have received close judicial scrutiny over many, many years. There’s an excellent history of them and the changes of public policy over time here.

The long line of cases on entire agreement clauses show that entire agreement clauses:

1. come in many shapes, sizes and complexity
2. are often ineffective to exclude all possible types of claims to which they are directed by contracting parties
3. depend upon the facts and circumstances in each case to be effective. The facts and circumstances include:
   1. the background to the contract
   2. the terms of the contract as a whole
   3. the precise terms of the entire agreement clause, within the context of the rest of the contract
4. fraudulent misrepresentation (a form of civil fraud) won't be protected.

No entire agreement clause is fool proof.

 

When are they used?

These sorts of clauses are especially popular in industries where sales methods are designed to induce one party to enter the contract:

• features and capabilities of a product or service
• quality of products
• capabilities to customise solutions to suit particular needs of the customer

There’re also used where there is an informal relationship preceding signing of formal contracts – such as after a letter of intent has been commercially agreed.

When drafted in the broadest possible way, they extinguish claims based on:

1. any and all previous contracts
2. informal working arrangements which have given rise to a legal relationship intentionally or unintentionally before the contract
3. collateral warranties
4. collateral contracts
5. implied contracts.

In one of the classic cases on entire agreements, Inntrepreneur Pub Co v East Crown Ltd (2000) , Lightman J considered an entire agreement clause in its stripped-down form:

[T]his Agreement…constitutes the entire Agreement between the parties.

The Judge said the purpose of these types of clauses is to:

preclude a party to a written agreement threshing the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim such as the present to the existence of a collateral warranty

[...]

For 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 the negotiations (which in the absence of such a clause might have effect as a collateral warranty) shall have no contractual force, save insofar as they are reflected and given effect in that document.

More importantly, the judge went on to say:

An entire agreement provision does not preclude a claim in misrepresentation, for the denial of contractual force to a statement cannot affect the status of the statement as a misrepresentation. The same clause in an agreement may contain both an entire agreement provision and a further provision designed to exclude liability for misrepresentation and breach of duty.

So entire agreement clauses are designed to counter matters relating to contractual agreement: not misrepresentation. Something further is needed for that: a non-reliance clause.

Excluding Representations

A reference to “representations” in an entire agreement clause may well end up being interpreted as a matter relating to contractual obligations and not misrepresentation.

That’s because they are different areas of law.

And that’s what happened in Axa Sun Life Services plc v Campbell Martin Ltd and others (2011). The Court of Appeal found that entire agreement clause was not effective to exclude the very things that it was intended to be drafted for.

That’s because references to "representations" (rather than misrepresentation) in a contract don’t amount to an agreement that representations are withdrawn, overridden or of no legal effect so far as any liability for the law of misrepresentation is concerned.

Also, a typically drafted entire agreement won’t affect terms implied into a contract. That’s because implied terms are not "prior" to the contract. They are part of the contract itself.

 

Legal Effect

In the course of the judgment, in Axa Sun Life Services the court held:

Since this is a question of construction, it depends on the precise words of the clause and indeed of the Agreement as a whole, and it is not necessarily helpful to rely on judgments on differently worded provisions.

Collateral contracts are also more difficult to assert. The parol evidence rule operates to exclude a range of evidence in respect of the agreement reached by the parties; the rule is not limited to excluding oral evidence, but extends to documentary evidence.

 

Example: Entire Agreement Clause

A simple boilerplate entire agreement clause might read as follows in appropriate circumstances:

This Agreement constitutes the entire agreement between the Parties and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written. There are no warranties, covenants, conditions or other agreements, express or implied, collateral, statutory or otherwise, between the parties in connection with the subject matter of this Agreement except as specifically set out herein.

Enhancements of clauses such as these are made where, say:

• the parties may intend for some prior agreement(s) to remain in force (and the circumstances may require it), and/or
• important conversations or proposals are intended to form part of the contractual relationship.

In complex or higher value transactions, an unqualified entire agreement clause may be unwarranted, as it may cause more problems than it solves for one or both of the parties: it may terminate all previous contracts between the parties.

Related: Boilerplate Clauses