Introduction This client alert is intended to provide a summary which considers the effectiveness and limitations of entire agreement clauses. It also includes some suggestions as to how one might seek to enhance their effects to cater for certain situations and requirements.
Questions regarding the effectiveness of entire agreement clauses appear to arise with increasing frequency in disputes, particularly disputes relating to long term contracts such as joint ventures, long term supply agreements, long term financing arrangements or amendments and/or renewals to such agreements or arrangements where parties have had a long course of dealings.
The issues tend commonly to play out when disagreements arise with regard to the meaning and effect of such contracts or arrangements and where a party attempts to look outside the contract terms themselves to support a claim, defence or argument.
Entire agreement clauses are often put into the category of “boilerplate” clauses by contract draftsmen. Boilerplate clauses are normally uncontroversial and often inserted into contracts by the parties as a matter of routine, without much negotiation or regard to the context and background to the relevant contract. They are commonly referred to and treated as being “standard” which sometimes means that they do not always attract as much attention and consideration as other contract terms, particularly commercial terms.
What is an entire agreement clause? An entire agreement clause is a good example of a boilerplate provision which parties spend little time negotiating, but whose terms can have unforeseen or unintended consequences on the contract and the parties’ rights.
A typical entire agreement clause might read as follows:
‘This contract contains the final and entire agreement and understanding between the Parties and is the complete and exclusive statement of its terms. This contract supersedes all prior agreement and understandings, whether oral or written, in connection therewith.’
The purpose of this type of clause is to try to ensure that the terms and conditions governing the parties’ obligations and their intentions are set out in a single contractual document. The aim, in turn, of this is to promote certainty and possibly to prevent parties from relying on statements or representations made in pre-contract negotiations in trying to ascertain what the contract requires by way of performance. Entire agreement clauses commonly seek to exclude representations and statements made by the parties which may have been relied on by the parties when entering into the contract, but which have not been expressly incorporated into the contract.
However, there are numerous limitations to the effectiveness of entire agreement clauses.
First, such a clause will not prevent the parties from relying on statements or documents ‘extrinsic’ to the contract – i.e. those documents that can be used to cast light on the meaning of the contract (though such extrinsic documents cannot be relied on to establish a separate contractual agreement between the parties).
In addition, case law has established four specific limitations to entire agreement clauses:
- Implied terms are not excluded
- Liability for misrepresentation is not excluded
- Mistakes can still be rectified
- “Estoppel by convention” can still be invoked
We expand on these four limitations below.
- Implied terms – An entire agreement clause will not, in general, exclude implied terms. If a party wishes to exclude implied terms from a contract, this should be done by a separate exclusion clause, such as:
‘Except as set out in this contract, all warranties, representations, conditions, terms and undertakings, express or implied, whether by statute, common law, custom, trade usage, course of dealings or otherwise (including without limitation as to quality, performance or fitness or suitability for purpose) in respect of the goods to be provided by the seller under this contract are excluded to the fullest extent permitted by law.’
However, each case must be considered carefully in light of the particular facts. The courts have occasionally, apparently in contradiction to the general rule, found that an entire agreement clause (as opposed to a distinct exclusion clause) can be used to exclude implied terms.
In Exxonmobil Sales and Supply Corporation v Texaco Limited1 an entire agreement clause was effective in excluding terms implied by usage or custom. In that case the clause provided:
‘This instrument contains the entire agreement of the parties with respect to the subject matter hereof and there is no other promise, representation, warranty, usage or course of dealing affecting it.’
If the aim of an entire agreement clause is to exclude implied terms, care must be taken to check that the wording of the entire agreement clause is precise enough to ensure that this intention is made clear. In the Exxonmobil case, it was the express reference to ‘usage’ that enabled one of the parties to rely on the entire agreement clause to prevent the implication of terms by usage.
- Misrepresentation – An entire agreement clause will not exclude liability for misrepresentation. Instead, parties can, and often do, exclude liability for misrepresentation2 by way of a statement, independent of the entire agreement clause, of non-reliance or a clause to the effect that the parties have not relied on any representation or statement aside from those set out in the agreement. An example of a non-reliance clause is:
‘Each party acknowledges that in entering into this contract it does not rely on any statement, representation, or warranty other than those expressly set out in this contract.’
- Rectification – A third limitation of an entire agreement clause is that it cannot be relied on to prevent the rectification of a unilateral or common mistake in circumstances where a contract is not a true representation of what was actually agreed by the parties.
- Prior agreements and estoppel by convention – Finally, when entering into a contract, parties should consider whether there are any agreements made prior to the contract which should be incorporated into such contract. If so, this should be done by expressly referring to and incorporating that agreement in to the new contract. Where this has been correctly done, an entire agreement clause will not operate to exclude this.
If, for whatever reason, the prior agreement is not expressly incorporated, that prior agreement can, in certain circumstances, give rise to a legally binding obligation, notwithstanding that the contract contains an entire agreement clause. This is due to the doctrine of estoppel by convention which was recently examined in the context of entire agreement clauses in Mears Ltd v Shoreline Housing Partnership Ltd3.
“Estoppel by convention” arises where the parties to a contract share an assumed state of facts or law and have acted upon that assumption such that it would be unjust or unconscionable to allow one of the parties to go back on that assumption.
Recent case law indicates that an entire agreement clause will not prevent a party from relying on estoppel to enforce a pre-contractual agreement.
In the case of Mears Ltd v Shoreline Housing Partnership Ltd, a social housing landlord (Shoreline) entered into an agreement by which Mears (a maintenance contractor), would service Shoreline’s properties. Mears began work for the landlord six months before the contract was ready for signature. Cost calculations for Mears’ work were made using a price list that differed from the formula that appeared in the signed contract. Subsequently it became apparent that the price list was not working, and the parties agreed a new composite code system. Mears invoiced and was paid according to the new composite code.
After the contract was signed, Shoreline discovered that the composite code system had not resulted in the savings that had been hoped for. Shoreline recalculated all prices according to the contractual pricing formula and withheld approximately £300,000 in payment. Mears sought to enforce the pre-contractual composite code prices.
The final contract included an entire agreement clause. Shoreline argued that this clause prevented Mears from relying on the pre-contractual arrangement. However, Akenhead J held that, ‘The “entire agreement” clause doesnot exclude or limit reliance on any established and effective estoppel, either on its express wording or by way of interpretation.’ It was found that prior to the commencement of the contract the parties shared an assumed state of facts and had relied on that assumption for a significant period of time, therefore it would be unjust to allow Shoreline to enforce the terms of the contract to avoid fulfilling its obligations under the pre-contractual agreement.
Conclusions While an entire agreement clause is a useful and very common “boilerplate” provision, it is not necessarily a total answer for excluding anything outside the written document itself. An entire agreement clause will not serve this purpose unless carefully drafted with the intention of excluding such other matters and even then it can be overridden. Parties are advised to think carefully about what they want to be included or excluded from their contract. In some circumstances, there may be pre-contractual exchanges, representations or statements on which a party does wish to rely. In that case, refraining from inserting a provision may be more beneficial. If the clause is inserted, any pre-contractual statements which that party wishes to be able to rely on would need to be included in the contract itself.
Further, parties might usefully consider whether there is any relevant pre-contractual conduct or custom between the parties which could be excluded by an entire agreement clause. Consider the scenario where a long-term contract is being renewed and an “Amended” or “Restated” agreement is signed by the parties. If an accepted practice has developed during performance of that contract which is not in accordance with its strict terms (e.g. issuing invoices after 30 days, when the contract says 14 days) but the restated contract is not amended to reflect this and remains in its original form, arguably the parties have excluded their right to rely on this previous conduct. To issue invoices after 30 days would now be a breach of contract under the new, restated, agreement. Parties must consider carefully the inclusion of an entire agreement clause both when entering into new contracts and when amending or restating existing contracts.
In summary, parties should ensure they have clarity up front as to what has been included and excluded from the contract prior to its execution. As we have seen, additional clauses will often need to be inserted into the contract toexclude implied terms or pre-contractual representations, or to include certain pre-contractual agreements. Without this, a simple misunderstanding could lead to costly litigation further down the line.