In the October 2006 edition of the Updater, we reported on the case of Cobbe v Yeomans Row Management Ltd and another [2006] EWCA Civ 1139, in which the Court of Appeal set out the circumstances in which it would grant equitable relief on the basis of proprietary estoppel.

The following case is interesting not simply because the court found that a proprietary estoppel arose (there being a striking resemblance to the facts before the court in Cobbe and in this case). The real significance of this case lies in the Court of Appeal's detailed analysis and construction of an entire agreement clause.

William David Lloyd and MGL (Rugby) Limited v Andrew Michael Sutcliffe [2007] EWCA Civ 153

A company (“Co 1”) owned options to purchase two sites for development. Co 1 was owned by Mr Lloyd. Mr Sutcliffe agreed to provide project management, design and construction services for the two developments and to make an equal investment in the developments, in return for an equal share in the share capital of Co 1, and an equal split of profits.

Before a written agreement was concluded to reflect this, Mr Lloyd required the agreement to be changed. Whilst it remained the case that Mr Sutcliffe would acquire 50 percent of the share capital in Co 1, and that Co 1 would continue to own the option to acquire one of the sites (“Site 1”); Mr Lloyd required the option to acquire the other site (“Site 2”) to be transferred to a new company (“Co 2”), owned by him and his cohabitee.

There was an understanding between Mr Lloyd and Mr Sutcliffe that, notwithstanding the fact that Mr Sutcliffe would not own any share capital in Co 2, the arrangements in relation to an equal sharing of profits would equally apply in relation to the development of Site 2. (Mr Sutcliffe would realise such profit through a building or other contract, rather than through his ownership of shares in Co 2.)

Mr Lloyd and Mr Sutcliffe entered into a shareholders agreement in relation to Co 1. The primary subject matter of this agreement was the operation of Co 1 and the business plan for Site 1. Nevertheless, there were express and implied references (in both the agreement and its attached business plan) to Site 2.

The entire agreement clause

The shareholders agreement contained the following entire agreement clause:

“This Agreement supersedes any previous agreement between the parties in relation to the matters dealt with herein and represents the entire understanding between the parties in relation thereto.” [Emphasis added].

Although Mr Lloyd and Mr Sutcliffe intended to enter into a written contract in relation to the development of Site 2, they did not do so. Their relationship then broke down. Mr Lloyd and Co 1 argued (amongst other things) that Mr Sutcliffe’s only remedy (if any) to secure a share of profits in relation to Site 2 would have been by way of quantum meruit (had Mr Sutcliffe claimed this) and that he had no other equitable remedy.

The judge’s findings

The judge found that both Mr Lloyd and (following its incorporation) Co 2 had persistently and over many months, given assurances, by words and conduct, to Mr Sutcliffe that he was to enjoy a share in the development of Site 2, and both had watched him, over a long period of time, act to his detriment in reliance on such assurances.

The judge held that it would be unconscionable for Mr Lloyd or Co 2 to deny that there had been an understanding that Mr Sutcliffe would have a share in the profits of the development of Site 2; and the judge declared (amongst other things) that an equity had arisen in favour of Mr Sutcliffe in respect of the profit to be made from the development of Site 2.

The Appeal: the entire agreement clause

Mr Lloyd and Co 2 appealed on several grounds, one of which being that, for proprietary estoppel to apply, it was necessary to establish an understanding between the parties about the development of Site 2. The entire agreement clause in the shareholders agreement precluded the judge from relying on extraneous material to establish such an understanding.

Did the entire agreement clause apply so as to defeat a claim of proprietary estoppel?

The Court of Appeal found that the entire agreement clause did not preclude the court from considering extraneous material to establish the understanding between the parties which was necessary to establish proprietary estoppel.

The court’s rationale was that the entire agreement clause had not been engaged because, in the context of an entire agreement clause, the most apposite dictionary definition of “to deal with” was to “handle effectively” or “dispose of”. The shareholders agreement had not “disposed of” arrangements in relation to the development of Site 2. Whilst there was one provision relating to Site 2, on matters of central importance, such as the arrangements for its development and destination of the profit, nothing had been spelt out in the agreement in relation to Site 2.

Alternatively, the court found that the entire agreement clause was irrelevant because it could only preclude reliance on understandings extraneous to the shareholders agreement that had arisen prior to the date of the shareholders agreement.

There was a mass of evidence that, by words or conduct, Mr Lloyd and Co 2 had reiterated the terms of the understanding after the shareholders agreement had been entered into. The entire agreement was irrelevant in relation to subsequent understandings.

A dissenting view on the interpretation of the entire agreement clause

One of the judges - Maurice Kay LJ - disagreed with the court’s finding that the entire agreement clause had not been engaged.

In Maurice Kay LJ ‘s view, the shareholders agreement did “deal with” Site 2 and this did cause the entire agreement clause to be engaged. If the clock had stopped at the date of the shareholders agreement, his Lordship said that, in his view, it would have been difficult for the court to hold that an equity had arisen. However, Maurice Kay LJ agreed that an equity had been firmly established on the basis of the alternative argument set out above, given the evidence of what had occurred subsequent to the shareholders agreement.

Editors’ comments

Although the entire agreement clause in question was contained in a shareholders’ agreement, similar wording is typically found in all types of contracts, including many contracts used in construction documents (such as appointments of professionals and development agreements).

The interpretation of the entire agreement clause in this case adopted by the majority in the Court of Appeal does seem to introduce uncertainty. How many and/or how significant do the issues - which are addressed in a contract in relation to a particular matter - need to be, before a matter is “dealt with” in the agreement?

Maurice Kay LJ ‘s interpretation of the entire agreement clause does not seem to introduce such uncertainty. However, his interpretation could result in unintended consequences.

In short, an entire agreement clause is often included in a contract as one of the “boilerplate” provisions: but it should be used with careful thought, and caution.

View William David Lloyd and MGL (Rugby) Limited v Andrew Michael Sutcliffe [2007] EWCA Civ 153