Entire Agreements clauses: all is not what it seems?

A discussion on entire agreement clauses and their limits.

28th January 2014

Introduction

Over the years entire agreement clauses have become a common feature of commercial contracts. They are often included as a matter of course rather than in response to a recognised client need. Judicial examination of such clauses began more than fifteen years ago, and has been more frequent in the past five years in Scotland. Despite this attention, some doubt remains as to the extent to which courts will uphold such clauses, and in doing so, confine the contents of a contract to the main contractual document. This article seeks to look at some of these cases and analyse both the general approach and the limits to their effect.

General approach

The primary purpose of an entire agreement clause is to prevent the parties to a written agreement claiming that statements made during contract negotiations, which are not included in the final agreement, constitute either additional terms of the agreement or a form of side or collateral agreement.

Earlier cases suggested that neither collateral contracts (Deepak Fertilisers and Petrochemicals Ltd v Davy McKee (London) Ltd (1998)) nor additional terms (McGrath v Shah (1989)) could have any effect if the contract had an entire agreement clause.

This position was restated by Lightman J. in 2000 (Inntrepreneur Pub Co v East Crown Ltd) where the court held that a suitably expressed entire agreement clause is effective to preclude collateral warranties or additional terms from having contractual effect. Lightman J succinctly summarised the purpose of an entire agreement statement:

“The purpose of an entire agreement clause 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”

The case of Mileform Ltd v Interserve Security Ltd [2013] EWHC 3386 (QB) shows that Lightman J’s approach generally holds today. This case concerned the terms and formation of a contract for the provision of warehousing, packaging, distribution and storage services. The claimant claimed that although the written agreement was silent on it, there had been an oral agreement to an exclusivity term within the contract. The defendant argued that there was no such agreement. The court found on the facts that there had been no oral agreement for ‘exclusivity’. But of interest for present purposes was the court’s finding that even had there been such oral agreement, it would have been precluded from having contractual effect by the entire agreement clause contained in the written agreement.

Limits

Therefore, the courts will generally uphold entire agreement clauses in contracts today; but there are some interesting limits to their effect:

Extrinsic evidence as an aid to construction

John v Price Waterhouse [2002] EWCA Civ 899

In this case it was found that extrinsic evidence is admissible as an aid to construing a contract. The judge referred to the decision of Lightman J in Inntrepreneur Pub Co. He examined an ‘entire contract’ clause in the case before him that was in similar terms. He held that clause to exclude what might otherwise have been a collateral warranty by denuding it of legal effect. However, he also held that a conventional ‘entire contract’ clause cannot affect the question as to whether some matter of fact (whether or not in documentary form) is admissible as an aid to the process of construing a contractual document. The logical distinction here is that in the latter situation, extraneous material is being referred to in order to cast light on the meaning of a contract or contractual term; this is in contra-distinction to a situation where extraneous material is sought to be founded upon to establish a separate agreement or condition.

Implied terms of contract and business efficacy

AXA Sun Life Services Plc v Campbell Martin Ltd [2011] EWCA Civ 133

In 2011 the courts confirmed that an entire agreement clause would not prevent terms from being implied into a contract where necessary for ‘business efficacy’ and where such terms are ‘intrinsic’ to the agreement. The court held that a general statement that a document is the entire agreement between the parties could not exclude implied terms; express exclusion of such terms would be necessary.

However, Stanley Burnton L.J. sought to underline the effectiveness of entire agreement clausese generally. He stated their purpose to be to promote certainty as to the terms of a contract:

“[S]ensible parties, faced with a written agreement of the length and detail of the Agreements, would not expect it to be attended by oral collateral agreements, and would expect their contract to be contained in the document they sign.”

For these reasons, he held the entire agreement clause to be reasonable in the circumstances. It can therefore be inferred that when such a clause forms part of a commercial agreement, particularly when the other party is commercially experienced, it will generally be held fair and reasonable for the clause to have effect. As is suggested by Lightman J. in Inntrepreneur, there is nothing inherently unfair about entire agreement clauses; they are a valid tool for prudent commercial parties.

Rectification

Surgicraft Ltd v Paradigm Biodevices Inc [2010] EWHC 1291

In this case the judge reaffirmed previous case law which supports the principle that an entire agreement clause will not prevent a party from bringing a claim for rectification on the basis that the document does not reflect what was actually agreed. (JJ Huber (investments Ltd v Private DIY Co Ltd [1995] NPC 102

Hawksford Trustees Jersey Ltd v Stella Global UK Ltd [2012] EWCA Civ 55

In this case the court found that although the terms of the contract were not ambiguous, because they did not reflect the common intention of the parties (due to a common mistake), they should therefore be rectified by the court. The fact that the contract contained an entire agreement clause did not, in itself, preclude rectification of the contract on the grounds that it failed to accurately reflect what was agreed.

Lessons learnt?

These cases highlight the importance of giving careful consideration to the drafting of entire agreement clauses. Although the courts will uphold entire agreement clauses which are expressed in general terms, parties should be aware of the limits to these clauses and consider whether to provide for further explicit exclusions, such as to the implication of terms. If the desire is to exclude certain liabilities, or to ensure that a specific term is not implied into a contract, then this should be expressly stated and it should not be assumed that a ‘template’ entire agreement clause will cover the position. Therefore, although entire agreement clauses should be considered when drafting contracts, it must be ensured that they are drafted considering the specific circumstances of the contract in question, and the parties’ requirements.