Introduction

A general principle of contract law is that the terms of a contract are those contained in the written document. By signing the document, the parties agree to be bound by its terms, and in most cases only the terms expressly set out, giving legal certainty. There are good policy reasons for the signed written document to represent the final version of what has been agreed. Such principles prevent a contract being undermined in the case of one of the parties subsequently finding that the terms of the contract no longer suit and/or endeavouring to find something in prior negotiations that could indicate a contrary intention.

There are a number of clauses that form part of the standard commercial contract and one such clause is the ‘entire agreement’ clause. This clause sets out to confirm that the signed written contract contains the whole agreement between the parties and supersedes all the terms previously discussed and deliberated. Nonetheless, it is often the case that litigation on what is or is not included in a contract still follows.

Recent case law on contractual dispute and entire agreement clauses

In the event of a dispute, a key evidence rule applicable to written contracts is that previous agreements or intentions not documented do not form part of the contract. However, there are exceptions to the rule of not looking beyond the terms of the signed contract. The courts will exercise the remedy of rectification when it is evident from pre-contractual negotiations that a mistake (either common or unilateral) has occurred. In the recent case of Chartbrook Limited and Another v Persimmon Homes Limited and Another [2009] UKHL 38 the criteria for exercising the remedy were restated. The judge quoted from Peter Gibson J in the case Swainland Builders Limited v Freehold Properties Limited [2002] 2 EGLR 7, page 74, paragraph 33:
‘The party seeking rectification must show that: (1) the parties had a common continuing intention, whether or not amounting to agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; and (4) by mistake, the instrument did not reflect that common intention.’

This principle was applied in the more recent case of Surgicraft Limited v Paradigm Biodevices Inc [2010] EHWC 1291 (Ch). Two companies, Surgicraft Limited (‘Surgicraft’) and Paradigm Biodevices Inc (‘Paradigm’) entered into a contract for the distribution by Paradigm of Surgicraft’s spinal implants across the North American market. The negotiations were fraught and last minute on various key issues including a payment to Paradigm in the event of Surgicraft being taken over and the new holding company terminating the contract. Agreement was eventually reached moments before Paradigm were due to launch the product on a version of the contract which included handwritten amendments by the principles representing the two companies. The contract was then ‘cleaned up’ in 2005 but the parties agreed this was not so as to introduce new terms.

The contract operated and it was not until the termination of it in 2008 that the claim of an alleged error in the contract arose and Paradigm sought rectification. Surgicraft argued that the 2005 contract contained an entire agreement clause stating ‘this agreement constitutes the entire understanding between the parties… and supersedes all prior agreements…’ which should either prevent a claim for rectification or at least give weight to the argument that the parties intended to be bound by what was documented regardless of what might have been intended.

The court addressed the matter of the entire agreement clause in the contract. The judge quoted from the case of Inntrepeneur Pub Co v East Crown Limited [2000] 2 Lloyd’s Rep 611 whereby it was confirmed that the purpose of such a clause was to avoid ‘threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement… on which to found a claim… to the existence of a collateral warranty.’ The judge distinguished the present case. In support of his view for the application of the remedy of rectification notwithstanding the existence of the entire agreement clause, the judge relied on the statement of Roger Cooke J in JJ Huber Limited v The Private DIY Company Limited (1995) 70 P& CR 33: ‘… a term that says “all the terms are in the contract” (which is, essentially what an entire agreement clause does) cannot be read as meaning “all the terms are in the document when it is in the wrong form”…’.

The judge did go on to say that the existence of an entire agreement clause might affect the court’s view of what was the parties’ common intention. He also stated that it could affect a decision if it was apparent that the meaning of the clause was part of the negotiations. In the present case, there was nothing to indicate that the contracting parties had considered the clause. The judge was satisfied that the case met the criteria for rectification and made an order to that effect.

The principles applied to property transactions

For contracts relating to land, the concrete nature of a written contract is supported by statute: section 2(1) of The Law of Property (Miscellaneous) Provisions Act 1989 states that a contract ‘for the sale or other disposition of an interest in land’ must (i) be in writing, (ii) incorporate all the terms that the parties have expressly agreed in one document or, where the contracts are to be exchanged, in each document (iii) be signed by or on behalf of each party. This provision operates in two directions: to provide certainty to those entering into a written agreement that the terms are binding and equally to ensure that parties are not bound by agreements relating to land that they did not intend to be bound by. However there are exceptions to the application of the section, for example in short leases, pre-emption agreements and auction contracts, to name but a few. The Act also clearly states in section 2(5) that ‘nothing in this section affects the creation or operation of resulting, implied or constructive trusts.’

We have seen how the courts can rectify contracts where the evidence clearly shows that the parties’ intentions are not reflected in the written contract. One outcome which has developed in the context of property transactions is for courts to find that a constructive trust has arisen. A constructive trust can be deemed to arise even where the parties did not intend to create a trust, in circumstances where the contractual position is either unfair or unconscionable to one of the parties.

In the case of Herbert v Doyle and another [2010] EWCA Civ 1095, the parties had verbally agreed an exchange of parking spaces along with agreement on other matters relating to the development of land. Both parties relied and acted on the verbal assurances given to each other. A dispute arose when one party reneged on his obligation to exchange parking spaces in return for the agreement of the other to his development. The court called upon a previous decision of the House of Lords (the case of Cobbe v Yeoman’s Row Management Limited [2008] 1 WLR 1752) to decide whether the oral agreement amounted to a constructive trust, the test being, did it achieve the sufficient level of certainty or completeness that is required under contract law? The present case was distinguished from the House of Lords case in that the parties had never intended to commit their agreement to writing, therefore avoiding the agreement being regarded as subject to contract, whereas in the House of Lords case, the aggrieved party had expected to receive a contract. As to the matter of completeness or certainty, there was dispute over the location of one of the parking spaces but it was the opinion of the court that the relevant interests in land were identifiable and the lack of identification of one of the parking spaces was insufficient to negate the existence of a constructive trust. Accordingly in that case, the parties were bound by oral representations without any written form of agreement.

Conclusion

You may be forgiven for thinking that the written contractual position is no longer a fixed concept. The exceptions for both general contracts and property related contracts could be regarded as amounting to an erosion of the written form of agreement. Therefore, if the written contract does not serve to support the contractual principle of certainty, why should we incorporate an entire agreement clause at all? In fact, there is still a place for the written contract and indeed the entire agreement clause. The general rule is still that extrinsic evidence is not admissible in the interpretation of a contract and the matter of a constructive trust by operation of law is exceptional, particularly in land related disputes. As regards the entire agreement clause, it is alive and well and in many cases has been extended to include statements of what can and cannot be relied upon, and any remedies available are restricted to breaches of contract! In addition, the purpose still remains, to operate to preclude any prior agreements resulting in collateral rights unintentionally having force.

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