Why incorporate an ‘Entire Agreement’ Clause

Why incorporate an ‘Entire Agreement’ Clause

The inclusion of an ‘entire agreement’ clause in many contracts is essentially a declaration that the contract represents the final and complete agreement between the parties, excluding all other previous agreements and representations. So what does this clause contain and why it is used?

A typical ‘entire agreement’ clause will say that:

a)   The contract is the whole of the agreement between the parties.

This is clear enough – anyone reading or interpreting the contract need not look any further than the contract itself, that it is self-contained and freestanding. This means that any external document has to be expressly incorporated into the contract.

b)   The contract supersedes any previous agreement or understanding.

This is to prevent any ambiguity about the status of any earlier agreements or understandings. So, any agreement about services and fees that had come into being via an earlier exchange of emails would be dismissed.

c)   The parties do not rely on any representation made prior to the making of the contract.

The last point is to prevent a party arguing that something said before the contract was entered into, can alter the meaning or effect of a contractual term.

In 2000, the learned Lightman J summed up the purpose of an entire agreement clause as follows:

“The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long-forgotten or difficult to recall or explain) on which to found a claim …. The entire agreement clause obviates the occasion for any such search and the peril to the contracting parties posed by the need that may arise in its absence to conduct such a search. For such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere.” [Inntrepreneur Pub Co v East Crown Ltd]

The general rule concerning the interpretation of a contract is that where a contract is made wholly in writing, oral evidence is not admissible to add to, vary or contradict its terms – Jacobs v Batavia and General Plantations Ltd (1924). This is the so-called “parol evidence rule”, (The parol evidence rule is a substantive common law rule in contract cases that prevents a party to a written contract from presenting extrinsic evidence that contradicts or adds to the written terms of the contract that appears to be whole. The supporting rationale is that since the contracting parties have reduced their agreement to a single and final writing, the extrinsic evidence of past agreements or terms should not be considered when interpreting that writing, as the parties had decided to ultimately leave them out of the contract.) which applies to all extrinsic evidence, not just parol (oral) evidence. But like many rules of the common law, there are many exceptions.

One such exception arises out of a defence that the contract does not contain the entire agreement between the parties – so, it can be immediately be seen that the inclusion of such an entire agreement clause prevents that exception being taken, to restore the “usual” position.

Another exception is that the rule does not prevent rectification of the contract and, moreover, an entire agreement clause does not prevent rectification either. In Surgicraft Ltd v Paradigm Biodevices  Inc (2010)there was a distribution agreement between the parties which provided for the payment of compensation in certain circumstances but not on a change of control of the claimant. Surgicraft validly terminated the agreement and sought a declaration that no compensation was payable, and  Paradigm by its counterclaim sought rectification to include compensation on such a termination event. The contract contained an “entire agreement” clause in the terms mentioned above. It was held that the “entire agreement“ clause did not prevent rectification to record the agreement between the parties  – the purpose of an entire agreement clause is “to limit possible contractual claims arising from dealings outside the contract” and that a claim for rectification is different “it proceeds on the basis that the parties have made a mistake in expressing their true agreement”.

In BSkyB Ltd v HP Enterprise Services Ltd (2010) the defendant was held not to be able to rely on an entire agreement clause to defeat a claim for misrepresentation – about its ability to deliver a project on time. The clause in this case did not contain a provision such as that at point 3 above, but did include one as at point 2. The point 2 wording was not sufficient to exclude liability for misrepresentations – the judge said that clear words are needed to exclude such a liability.

We can return to the Inntrepreneur and note that after the extract above Lightman J continued

“… and that accordingly any promises or assurances made in the course of the negotiations … shall have no contractual force, save in so far as they are reflected and given effect in that document “ but this did not present any difficulty to the judge in BSkyB, because Lightman J continued “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.”

So, to be effective, an entire agreement clause has to contain all the three points noted earlier. The danger of using such a clause is that one party might want subsequently to rely on another document or statement, and not be able to, unless rectification is available; the advantage is that you have the certainty of everything being in the one document.

MALCONLAW 2011