This article first appeared in the June 2011 edition of The In-House Lawyer.
The frequency with which entire agreement clauses have come before the courts for consideration demonstrates why it is so important that such clauses are carefully drafted to effectively protect the party seeking to rely on it, particularly with regard to excluding liability for misrepresentations. The recent case of AXA Sun Life Services Plc v Campbell Martin Ltd 1 provides useful guidance as to how such clauses can be drafted so as to ensure that no terms or pre-contractual negotiations will be construed as forming part of the contract. Furthermore, it also suggests that liability for misrepresentation can be avoided if the relevant clause is worded correctly.
Brief Overview of Relevant Law
Entire agreement clauses operate to exclude liability for pre-contractual statements that do not appear in the written contract. In this way, such clauses can help the parties limit or even avoid the costs of litigation by providing certainty that the terms of the contract are limited to those that are set out in the final written agreement which contains the clause itself.
- Entire agreement clauses will necessarily vary in accordance with the precise needs of the party drafting them, but typically include the following elements:
a statement of the parties' agreement that all of the terms of the contract are expressly recorded in the document containing the statement and nowhere else; and
a statement specifically excluding liability for misrepresentation, such as:
a non-reliance statement (acknowledging that there has been no reliance on statements that are not set out in the written agreement)
an express exclusion of liability for misrepresentation (this may apply to pre-contractual representations and/or those that appear in the written agreement)
an exclusion of non-contractual remedies (effectively limiting the remedies to those available for breach of contract, which does not include rescission).
However the precise wording used in the statement can prove critical as the number of disputes concerning the effectiveness of entire agreement clauses demonstrates.
AXA Sun Life v Campbell
AXA Sun Life Services Plc (AXA) claimed damages due under a number of standard form agreements (the Agreements) under which the Defendant Companies had agreed to provide specified financial services as AXA's agents. The Defendant Companies counterclaimed for loss and damages, alleging that AXA had made negligent misrepresentations which had induced them to enter the Agreements and/or breached collateral warranties and/or breached implied terms of the Agreements. AXA argued that liability for each of these grounds was excluded by virtue of its entire agreement clause in the Agreements (the Clause) which stated that the Clause would "supersede any prior promises, agreements, representations, undertakings or implications whether made orally or in writing ... relating to the subject matter of [the] Agreement."
At first instance, in the High Court, the judge held that the Clause did not preclude the Defendant Companies from relying on any of the grounds of their counterclaim. AXA subsequently appealed to the Court of Appeal which was asked to consider whether the Clause excluded liability for negligent misrepresentation and/or breach of collateral warranties and/or breach of implied terms and whether it was enforceable pursuant to the Unfair Contract Terms Act 1977 (UCTA) and the Misrepresentation Act 1967.
The parties accepted that the Court of Appeal's decision in Springwell Navigation Corp v J P Morgan Chase Bank 2 provided that entire agreement clauses, such as the Clause, that were contained within signed written agreements, were part of the contractual agreement by which the parties had agreed to be bound. This authority was binding on the Court of Appeal, although the Defendant Companies reserved their right to argue in the Supreme Court that Springwell had been wrongly decided. Furthermore, the Defendant Companies accepted that the Clause effectively excluded collateral warranties as a matter of construction, something which as noted by Lord Justice Stanley Burnton had not been expressly addressed by the judge at first instance. However there was a dispute as to whether the Clause also excluded liability for misrepresentation and/or for breach of implied terms.
The court of appeal found the following:
The Court of Appeal found that the Clause did not exclude liability for misrepresentations. Lord Justice Rix concluded that, as a matter of construction, considering the words used and the surrounding clauses, the Clause was concerned with contractual obligations as opposed to the exclusion of liability for misrepresentation. Furthermore, Rix LJ noted that AXA had not employed any of the traditional methods of excluding liability for misrepresentation such as statements of non-reliance, exclusion of liability or exclusion of non-contractual remedies.
In determining the effect of entire agreement clauses on misrepresentation, Rix LJ cited the judgment of Lightman J in Inntrepreneur Pub Co v. East Crown Ltd 3, "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." Rix LJ also cited with approval the judgment of Ramsey J in the recent case of BSkyB Ltd v. HP Enterprise Services UK Ltd 4 where a similar provision to the Clause had been considered, "While there is a reference to representations, there is nothing in the clause that indicates that it is intended to take away a right to rely on misrepresentations... I consider that clear words are needed to exclude a liability for negligent misrepresentation and that this clause does not include any such wording."
In relation to the exclusion of liability for breach of implied terms, Stanley Burnton LJ held that implied terms that were 'intrinsic' to the agreement (i.e. those implied to give business efficacy to the agreements) were not excluded by the Clause in the absence of any express specific exclusion. However, he said that those implied terms that were 'extrinsic' to the agreement would be effectively excluded.
Although entire agreement clauses are not generally considered exclusion clauses for the purposes of UCTA, because the Agreements concerned were written on AXA's standard terms of business it was caught by section 3 of the legislation. This provides that a reasonableness test has to be satisfied where a party is claiming to be entitled to perform something substantially different to that which was reasonably expected of him. The court held that collateral warranties fell under this description and accordingly subjected the Clause to the reasonableness test. Had the Clause also excluded liability for misrepresentations, the same requirement would have been imposed by section 3 of the Misrepresentation Act 1967.
In applying the reasonableness test to the Clause, Stanley Burnton LJ acknowledged that the Agreements had been made by commercial organisations in a commercial context, were subject to short notice periods for termination, the Clause was a standard term in the insurance industry and the Defendant Companies could be expected to have read the Agreements into which they had entered. Moreover, it was reasonable that the entire contract would be contained within the Agreements instead of appended with oral collateral agreements. Accordingly, the Court of Appeal found that it was reasonable to include the Clause in the Agreements.
Impact of AXA Sun Life v Campbell
As Rix LJ concluded in his judgment, each case is only authority for the particular wording of the clause under consideration. However, it is possible to extract key themes from this decision that are applicable to all entire agreement clauses. In particular:
- A clear statement is required to effectively exclude liability for misrepresentation.
In the absence of such a statement, and particularly where the word 'representation' is couched among other words of contractual obligation, the entire agreement statement will not in itself be sufficient to exclude liability for misrepresentation.
On the one hand this case seems to clearly affirm recent case law, most notably the BSkyB case, which suggests that a separate clause is required with clear wording in order to exclude liability for misrepresentation. However, although Rix LJ was unequivocal in his consideration of whether the misrepresentations were excluded, there may be scope for further legal argument citing Stanley Burnton LJ's judgment, in which he made a distinction between misrepresentations that related to the terms of the agreement and those that did not. He was emphatic that the latter were not excluded.
Stanley Burton LJ's conclusions on the exclusion of implied terms may also provide guidance to those drafting contracts. They suggest that entire agreement clauses will not automatically exclude implied terms necessary to make the contract work, but if the parties expressly signal that this is their intention, such terms shall not be included - regardless of the effect this may have on the operation of the contract - in order to give effect to the parties' wishes.
This case also provides guidance in relation to the applicability of UCTA to entire agreement clauses, with it seeming probable that such clauses will pass the reasonableness test. By analogy, one might argue that had the appropriate statements excluding misrepresentations been present in this case, the requirements of the Misrepresentation Act 1967 would also have been satisfied.
Practical Advice For Those Drafting Contracts
This case emphatically underlines the need for careful drafting when using an entire agreement clause. Although it may be considered as a boiler plate provision, complacency in drafting can leave the party seeking to rely on it vulnerable as the clause may be rendered ineffective. The Court of Appeal ruling suggests that words such as "representations" and "supersede" are "the language of defining contractual obligations" and as such the entire agreement clause in itself will not be sufficient to avoid liability for misrepresentations which may induce parties to enter into the contract but are not themselves terms of the contract.It is therefore important that the terms of any entire agreement clause anticipate exactly what other information, outside of the contract, is to be specifically expressed to be disregarded when interpreting the contract.
Should a party wish to exclude liability for misrepresentations then this needs to be clearly expressed, but it should be borne in mind that this could equally work against a party should the counter party later be found to have made misrepresentations. It is also worth remembering that liability for fraudulent misrepresentation cannot be excluded.
Similarly, the exclusion of implied terms is best achieved by way of a specific exclusion that uses clear wording. Stanley Burnton LJ's judgment suggests that this method may be effective for excluding liability for implied terms that are both intrinsic and extrinsic to the agreement.