A client recently said that he doesn't care if the economy gets better or worse, it's the uncertainty that makes it hard to take decisive action. This is a fact of business, and as solicitors acting for our clients, it is our job to assist clients to avoid uncertainty. Ambiguity in contracts, unless for a deliberate purpose, is poor drafting.
A court, when asked to interpret a commercial contract, will follow certain principles of interpretation, for example:
- by putting itself in the position of a reasonable person in possession of the background information reasonably available to the parties the court will try to ascertain the objective intention of the parties when entering into the contract; and
- where ambiguity arises in the wording, the court will choose the interpretation that makes the most commercial sense.
It is the natural meaning of the words that apply in the first instance. Commercial sense is secondary and reserved for ambiguities. Therefore straightforward and simple language will best serve the client. Clarity is certainty.
Drafting example: Entire Agreement Clauses
The purpose of an entire agreement clause is to promote certainty for the parties.
An entire agreement clause seeks to prevent parties to a contract introducing evidence outside of the written contract in order to vary the terms of that contract. It does not, however, prevent extrinsic evidence being used to aid the interpretation of the contract. Neither does it prevent rectification being sought if the contract incorrectly records the agreement reached or if there was a common mistake of the parties.
An entire agreement clause typically contains:
- an entire agreement statement, i.e. that the contract contains the entire agreement between the parties and any previous agreement between the parties (written or oral) is terminated or superseded;
- a non-reliance on representations statement, i.e. that the parties only rely on statements in the contract and specifically exclude any representations, except fraudulent misrepresentations, made outside the text of the contract; and
- a limited remedy statement, i.e. that the parties can only seek remedies to the extent set out in the contract, typically providing that only damages can be claimed in the case of a breach of contract.
The clause might also contain a statement that it does not exclude liability for fraud.
The risk in drafting such a clause is that it does not achieve what is intended. Either it does not expressly state what is being excluded, or it goes too far, possibly being struck down for being unreasonable.
The entire agreement clause should be divided into distinct sub clauses. This would provide a clear layout, with distinct points in each sub clause allowing for straightforward statements to be made on each point. Coupled with a severance clause this would permit, at least, a court to sever any unenforceable part of the entire agreement clause leaving the remainder enforceable.
The entire agreement statement should include reference to any side letters or other ancillary agreements signed before or alongside the contract itself which are to form part of the entire agreement. So for example in the entire agreements clause in a share purchase agreement, reference would be made to the tax deed, disclosure letter etc.
Certain terms, which might not be written in a contract, may be implied by Statute, 'business efficacy' or otherwise. A general entire agreement statement that a contract is the entire agreement between the parties does not exclude such implied terms. An express exclusion would be necessary to exclude these implied terms so far as they can legally be excluded.
Frequently, the entire agreement statement seeks to terminate all prior agreements between the parties. This might not be appropriate in the circumstances and typically it should be limited to agreements on the same subject matter.
Despite the similarity of non-reliance statements to what are known as exclusion clauses regulated under consumer protection legislation, in a situation between two commercial parties of equal bargaining power, a non-reliance statement will usually be upheld as being reasonable. This is provided that the non-reliance statement carves out fraudulent misrepresentation. Any attempt to exclude fraudulent misrepresentation will be deemed unreasonable and struck down.
Pre-contractual misrepresentations need to be expressly excluded in the non-reliance statement. Any representations that are sought to be relied on should be included as a warranty in the contract.
In addition, there are a number of complimentary clauses that may provide further certainty for the client. For example, a limitation of liability clause might be included should the entire agreement clause fail. This would provide some comfort for the client about the possible exposure under the contract. A variation clause, providing that variations or waivers of the terms of the contract must be in writing to be valid, would assure the client that the contract forms the entire agreement going forward.
Usually parties do not pay particular attention to the miscellaneous clauses often contained at the end of the document, having concentrated in negotiating on the main terms. But when issues arise between the parties the miscellaneous clauses can be key to interpreting a contract. The entire agreement clause is one such clause. Care should be taken when using these general provisions from precedent documents to ensure miscellaneous clauses reflect the current circumstances. The importance of clearly drafting these clauses must not be forgotten.