Most, if not all, commercial contracts will contain an entire agreement clause (also referred to as a whole agreement, integration or merger clause). The purpose of such a clause is to exclude the liability of a party for any statements or representations (including pre-contractual representations) which are made other than those which are expressly stated in the contract. For example, in employment contracts a well drafted entire agreement clause would prevent an employee from claiming they are owed more than is stated in the contract. In a sale of goods contract, the entire agreement clause would prevent a customer from relying on any representations made by a salesperson unless those representations are included in the contract. Once included in a contract, a court will examine the precise wording of an entire agreement clause to determine its meaning and effect. If the clause has not been drafted clearly then the court will seek to infer the intentions of the parties. It is for this reason that an entire agreement clause is often considered to be one of the most important boilerplate clauses in a contract and has tended to feature regularly in litigation disputes.
The High Court was asked this year to consider the enforceability of an entire agreement clause in the context of whether it permitted the defendant to escape liability for innocent and negligent misrepresentation by the inclusion of a non-reliance statement in the relevant entire agreement clause. Not only did the High Court uphold the effectiveness of the entire agreement clause in question but it also further held that the inclusion of a non-reliance statement effectively excluded liability for innocent and negligent misrepresentation. The decision of the High Court emphasises the importance of having a well drafted entire agreement clause particularly with regard to the effect of a non-reliance clause which can be a useful mechanism for avoiding liability based on innocent and/or negligent misrepresentation.
A well drafted entire agreement clause will typically contain the following key features: (i) a statement (usually referred to as an entire agreement statement) that the agreement contains the entire agreement between the parties and supersedes any previous agreement (written or oral) between the parties; (ii) a statement (commonly referred to as a non-reliance statement) that the parties have not relied on any representations (including pre-contractual representations) other than those which are set out in the agreement; (iii) a statement that the only remedies available to the parties are those which are set out in the agreement or that the only remedy available under the agreement will be for breach of contract; and (iv) a statement that the clause does not exclude liability for fraud.
This article briefly analyses the key features of an entire agreement clause in light of recent case law and considers certain practical safeguards to follow to when drafting such a clause.
Entire agreement statement
The purpose of an entire agreement statement is to exclude one of the exceptions to the “parol evidence” rule which allows evidence to be produced to vary the terms of a written contract, if it can be shown that the contract was not intended to express all the terms agreed between the parties. The entire agreement statement excludes this exception by expressly stating the intentions of the parties that all terms agreed between them are as set out in the agreement. Such a statement is usually acceptable to parties who intend their contractual obligations to be recorded in one place. However, such a statement on its own does not prevent a party from claiming that they entered into the contract in reliance on a misrepresentation of the other party or its representatives. In order to do so the entire agreement clause would also need to include a non-reliance statement (which is discussed below). An entire agreement statement on its own does not also prevent a party from bringing a claim against the other party for events occurring after the contract has been signed and a claim for rectification on the basis that the contract does not reflect the terms actually agreed between the parties. In relation to claims for rectification on the basis that the agreement does reflect what was actually agreed between the parties, the courts have been reluctant to deprive a party from relying on an entire agreement clause to prevent the other party from relying on terms set out in other documents, where there have been extensive negotiations between the parties using legal advisors.
An entire agreement statement by itself will not prevent a claim for misrepresentation unless it says that it will. The court considered the effectiveness of an entire agreement clause that purported to exclude liability for misrepresentation and in particular a pre-contractual misrepresentation. The court found that the relevant clause did not exclude remedies for pre-contractual misrepresentations because it did not expressly say so, nor was the defendant covered by the non-reliance statement because the relevant representation fell within the representations set out in the agreement.
However, as mentioned above the High Court has held that the effect of a non-reliance statement which was included in an entire agreement clause was sufficient to exclude a landlord’s liability for innocent and negligent misrepresentation in connection with a claim brought by a tenant for damages for certain fraudulent misrepresentations made by the landlord. Although the decision of the High Court focussed on the landlord’s potential liability for fraudulent misrepresentations in relation to statements made by the landlord in connection the predicted number of visitors to a motorway services facility, it is clear that the inclusion of the non-reliance statement was key in allowing the landlord to avoid liability for innocent and negligent misrepresentation. It is worth noting that in relation to the claim for fraudulent misrepresentation the High Court found that none of the alleged representations were false when made. The landlord believed them to be true and had reasonable grounds for doing so.
One of the issues that frequently arises in the context of non-reliance statements is whether there are, in effect, exclusion clauses and therefore required to satisfy the reasonableness test under section 11(1) of the Unfair Contract Terms Act 1977. This was certainly the view of the court in one particular case where it held that a form of words in an agreement which effectively restricted a party’s right to bring a claim for damages for misrepresentation should be construed as an exclusion clause. The other view taken by the courts is that non-reliance clauses are designed to restrict liability for misrepresentation on the basis that the parties do not intend that such a liability should ever arise in the first place and therefore remove a key requirement to establishing a claim for misrepresentation, which is reliance. It has been suggested by some commentators that non-reliance clauses should be construed as exclusion clauses. Nevertheless, the courts have held that where the parties are of equal bargaining power and commercial standing a non-reliance clause will usually be upheld as being reasonable provided that the clause also expressly carves out fraudulent misrepresentation (which is discussed below).
A non-reliance clause will also contain a statement that the only remedies available are those set out in the contract. Such a statement is designed to ensure that the parties do not have any remedies for prior representation other than for breach of contract.
Carving out fraudulent misrepresentation
A clause which seeks to exclude liability for pre-contractual representations but does not distinguish between innocent, negligent and fraudulent misrepresentation will be deemed to be unreasonable and therefore ineffective on the basis that it is purporting to exclude fraudulent misrepresentation. Consequently it is now common for entire agreement clauses to include an express carve out for fraudulent misrepresentation to ensure that the clause will be held to be fair, reasonable and enforceable.
When drafting a contract which includes an entire agreement clause the following points should be considered so as to ensure that such a clause is upheld and effectively excludes liability for pre-contractual misrepresentations:
- The entire agreement clause should be divided into distinct clauses so that if any part of it is rendered unenforceable then the courts applying the doctrine of severance (or in the event of there being a severance clause in the contract) can sever the offending provision from the contract whilst leaving the remainder of the clause enforceable.
- The entire agreement statement should include all documents containing the terms agreed between them. This should include side letters or other ancillary agreements which may be signed at the last minute before the main agreement is signed.
- In the context of a non-reliance clause, if pre-contractual representations are to be excluded this must be expressly stated. If a party has relied on statements or representations made by the other party, these must be expressly included as warranties in the agreement.
- It is important to ensure that any pre-contractual statements that are made before the agreement is signed are correct to avoid any potential claims for fraudulent misrepresentation being made.
- An entire agreement clause should be considered in light of any limitation clause in the agreement so that if the entire agreement clause is rendered in effective the liability of the parties under the agreement will be limited.