The recent case of Surgicraft Ltd v Paradigm Biodevices Inc [2010] EWHC 1291 (Ch) considered a claim for rectification where there was a common mistake in a contract. The claim was opposed on the basis that, because the agreement contained an entire agreement clause, terms that had been omitted from it could not be inserted. The claim for rectification was, however, upheld, on the basis that an entire agreement clause does not operate to prevent rectification where the terms of the agreement do not accurately reflect the intention of the parties. As entire agreement clauses can be easily overlooked as standard boilerplate terms, and rectification can be difficult to apply for successfully, this article takes a brief look at both issues.

Entire agreement clauses

The boilerplate of nearly every agreement will contain an entire agreement clause. They are intended to prevent a party to an agreement from relying on any statement or representation which is not contained in the agreement, and usually consist of four elements, as follows:

  • whole agreement - a statement that the contract contains the whole agreement between the parties and supersedes any previous agreements. This is designed to achieve commercial certainty and to make it clear that the "parol evidence" rule (that outside evidence cannot be adduced to vary a written contract) applies. However, while the words will, in general, prevent evidence being adduced to alter the written terms, they will not, on their own, be sufficient to exclude or limit remedies for misrepresentation. For this reason, the next two elements are also included
  • non-reliance - an acknowledgement from the parties that they have not relied on any statement or representation which is not included in the written agreement as, for example, warranties. The view of the courts as regards non-reliance statements varies, with them being seen either as clauses excluding liability for misrepresentation, or clauses which prevent liability arising in the first place. However, when taking the latter view, the courts have held that if a party actually knew that the other party was relying on a non-contractual representation, it will not be able to avail itself of the benefit of the clause. Inclusion of the next element can, however, make this concern redundant
  • exclusion of remedies - an acceptance by the parties that they have no remedy for any statement or representation which is not included in the share purchase agreement. By expressly excluding such remedies, the possible ineffectiveness of a "non-reliance" statement becomes irrelevant
  • exclusion for fraud - section 3 of the Misrepresentation Act 1967 provides that a clause which seeks to exclude or restrict liability for misrepresentation will be of no effect unless it satisfies the requirement of reasonableness in section 11(1) of the Unfair Contract Terms Act 1977. The non-reliance section of an entire agreement clause could, if taking the exclusion of liability view, fall within the scope of section 3, but, in any event, the exclusion of remedies limb will do so. Nonetheless, the courts have held that, generally, in corporate transactions between parties of equal bargaining power, a clause which seeks to exclude or restrict the liability of a party for contractual or non-contractual misrepresentations will be reasonable. However, if the entire agreement clause purports to exclude liability for fraudulent misrepresentation, it seems likely that it will be unreasonable. Case law is not clear on the point, but the highest instance decision takes this view and it is, therefore, generally considered the safest interpretation. For this reason, it is standard practice for entire agreement clauses to include a carve-out in respect of fraud.

Practical considerations

When drafting or agreeing to an entire agreement provision, parties should consider whether the clause should be limited to the agreement in question or extended to include other documents.

Because representations outside the agreement will be excluded, parties will need to ensure that all representations they are relying on are set out in the agreement. This will be particularly important for buyers on M&A transactions.

As outlined above, there can potentially be issues with the interpretation and enforceability of entire agreement clauses. For this reason, it is worth drafting them so that they are split into distinct elements so that if any part is found to be invalid or unenforceable it can be severed from the clause leaving the remaining provisions intact (it is also important to make sure that the agreement includes a suitable severance/invalidity provision).

While entire agreement clauses will seek to exclude remedies for non-contractual representations, a seller in an M&A transaction may well want to extend this exclusion to contractual remedies so that the buyer's only remedy is for breach of contract.

It is important to check that the entire agreement clause does not conflict with other provisions in the agreement. For example, a clause which provides that remedies set out in the agreement are in addition to, and not exclusive of, any rights or remedies provided by law, will conflict with the exclusion of remedies limb.

In M&A transactions, entire agreement clauses may be drafted to protect only the seller. While it is admittedly less likely for a buyer to want to rely on an entire agreement clause, it is still likely to want the clause to be mutual.

Rectification

While entire agreement clauses will prevent external evidence being adduced to vary a written agreement in most situations, there will be occasions when such evidence can be admissible and the terms of a contract varied as a result. Rectification is one such instance, as illustrated by the Surgicraft case referred to above.

Rectification is an equitable remedy awarded at the discretion of the court. It is available to amend the terms of a written agreement where it does not accurately reflect the terms that were agreed, either because terms were omitted or because they were wrongly recorded. In order for a claim for rectification to succeed, it has to be shown that the contract as amended will give effect to the parties' true intentions. The burden of proof is therefore high, and is on the party seeking rectification. The claimant will have to provide convincing evidence of the mistake and the parties' actual intentions. The remedy is available in respect of common or unilateral mistakes.

While rectification deals with correcting errors in contracts it is to be contrasted with the doctrine of mistake (of law or of fact) which deals with the beliefs of the parties at the time they entered into the contract. It should also be contrasted with matters of construction where contracts are varied because they literally do not make sense as drafted.

Conclusion

Boilerplate clauses are often taken for granted and are not always examined in detail because it is assumed their terms are standard. As they offer valuable protection, it is always worth checking that they have been correctly drafted to reflect the intentions of the parties - as seen here, even boilerplate provisions can be amended to better suit the position of either party. Where agreements are amended heavily during negotiations and clauses added or deleted, it is also worth checking to ensure that the boilerplate provisions are consistent with the rest of the agreement. While there are remedies available to correct contracts after signing, such remedies cannot always be relied on, either because of the very high standard of evidence that will be required (as with rectification), or because certain evidence may be inadmissible.