Parties often wish to ensure their relationship is contained in one document that sets out the agreement that has been reached. Entire agreement clauses are included as a standard part of most contracts for this reason. Their purpose is to prevent a party from being able to rely on any statements or representations other than those expressly set out in the document in which they contract.
Entire agreement clauses are typically made up of three key elements: a statement that the contractual document includes the ‘whole’ agreement; an acknowledgement that the parties have not relied on any representation not set out in the agreement; and confirmation that the clause does not seek to exclude liability for fraudulent representations. This article deals with the first two elements. Drafted properly, entire agreement clauses will significantly reduce the risk of claims being brought on the basis of what has been said, done or written ‘outside of the contract’.
When disputes arise, however, it is common for litigants to seek to circumvent such clauses, particularly when the contract does not contain the agreement thought to have been reached, or does not reflect the agreement that the aggrieved party hoped had been reached. Typical methods of circumvention include claims of pre-contractual, oral or written agreements not contained within the contract (known as collateral warranties), allegations of pre-contractual misrepresentations or assertions of implied terms.
Ravennavi SpA v. New Century Shipbuilding Company Limited
An entire agreement clause was tested recently in the case of Ravennavi SpA v. New Century Shipbuilding Company Limited. The High Court held that an entire agreement clause written in a contract was able to negate the effect of all the terms of a previous written agreement relating to the same subject matter. The case also demonstrates that a short form entire agreement clause is capable of defeating an existing formal written agreement, not just a representation made during negotiations.
There were two key documents to the dispute, a shipbuilding agreement and an options agreement. Under the options agreement Ravennavi had the option to require New Century to build two oil tankers. If the option was exercised a separate shipbuilding contract would be deemed to come into existence for each vessel, based on the terms of an earlier shipbuilding contract, to be replaced within a month with a new contract on similar terms. The option was signed and the contracts came into force. Each contract contained the following entire agreement clause:
“This contract contains the entire agreement and understanding between the parties hereto and supersedes all prior negotiations, representations, undertakings and agreements on any subject matter of this contract prior to the signing of the contract”.
Each of the agreements had the same delivery dates as the option agreement but did not contain a provision that was in the option agreement which effectively gave Ravennavi the right to have its ships delivered early if New Century had spare capacity. A dispute arose when it came to light that New Century had contracted with other parties to build and deliver oil tankers earlier than those for Ravennavi. Ravennavi claimed that it should have been given first refusal but New Century argued that the option agreement was excluded by the entire agreement clause in the shipbuilding contract.
The judge agreed with New Century that the entire agreement clause did what it was intended to do. Authority was also given to the effect that an abbreviated entire agreement clause is sufficient to show that the parties intended the contract to be the extent of their agreement.
This case illustrates that a short-form entire agreement clause can defeat not just a representation made during the course of negotiations, but also an existing formal written agreement. If drafted properly it will give sufficient protection against claims by the other party seeking to rely on previous agreements or representations.