Avoid a contractual own goal - the importance of entire agreement clauses
Associate Michael Budd looks at the importance of clarity when drafting entire agreement clauses
The interpretation of entire agreement clauses has appeared before the courts once again, this time before the high court in the recent case of Al-Hasawi v Nottingham Forest Football Club (and others) [Nov 2018]. The clause in question appeared in a share purchase agreement relating to the sale and purchase of shares in the club. The issue was whether the wording of the entire agreement clause prevented the buyer from commencing a claim against the seller for misrepresentation.
In simple and general terms, in order to claim misrepresentation, a claimant must show a misrepresentation of fact or law aimed at inducing the other party to enter into a contract and in respect of which the claimant has suffered loss.
If a claimant can show that the defendant has made a misrepresentation to it, the claimant’s remedy is to be placed in the position it would have been in had the misrepresentation not been made, which means damages will be the amount by which the claimant has lost as a result of relying on the misrepresentation. Depending on the type of misrepresentation the remedy of rescission may be available to the claimant under which the parties are restored, so far as possible, to their pre-contractual position.
As regards entire agreement clauses themselves, these are typically boilerplate provisions appearing towards the end of the main body of an agreement and so it is perhaps easy to overlook their importance.
Generally, the object of entire agreement clauses is for the parties to record all of their obligations in relation to a transaction in one document (or related documents) and to exclude any other documents or statements from having legal effect. Their purpose and effect was expressed in Inntrepreneur Pub Co v East Crown Ltd :
"…they 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… 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 and that accordingly any promises or assurances made in the course of the negotiations… shall have no contractual force, save insofar as they are reflected and given effect in that document."
The wording of the entire agreement clause in the present case stated:
"This agreement (together with the documents referred to in it) constitutes the entire agreement between the parties and supersedes and extinguishes all previous discussions, correspondence, negotiations, drafts, agreements, promises, assurances, warranties, representations and understandings between them, whether written or oral, relating to its subject matter."
The word 'representations' appears in the above clause but the court did not consider that this included claims for misrepresentation. The court noted that clear words must be used to exclude non-contractual claims and whilst the word 'representation' might include 'misrepresentation' the mere fact that such a meaning could be inferred was insufficient. In respect of a similarly worded clause in the case of Axa Life Services Plc v Campbell Martin Ltd and others , the court said that whilst the word 'representations' appeared in the clause in question in that case (as it does above) those words were of a contractual nature and no exclusion of misrepresentation was intended. It went on to say that "the essence of agreement is that it is concerned with matters which the parties have agreed. The essence of misrepresentation, however, is that it is not concerned with what the parties have agreed, but rather with inaccurate statements (innocently, negligently or fraudulently inaccurate statements) which have been made by one party to the other…"
Therefore, in order to exclude liability for misrepresentation clear words to that effect will need to be included in the relevant clause. If a buyer is able to bring a claim for misrepresentation, or indeed any other tortious claim, the legal remedies available to it are likely going to be more beneficial to it than a claim in contract. The acquisition agreement will typically contain provisions aimed at protecting the seller, but it may not be the case that such protections extend to misrepresentation claims. If the seller is able to do so, it should avoid giving representations whether expressly or by implication for example including wording in the acquisition agreement that could be construed as a representation, such as indicating that the buyer is relying on certain statements given by the seller when the parties enter into the agreement.
In the context of a share, business or asset sale (though the same will apply to other transactions), a seller will to want to ensure that the entire agreement clause covers four main situations, namely:
- It will limit the agreement of the parties to the written agreement alone and prevent any of the parties from claiming that there are other terms of the agreement;
- It will note that the parties are not relying on representations (and any promises, arrangements, etc) which are not set out in the agreement;
- It will exclude liability for misrepresentation (perhaps both pre-contractual representations and those set out in the agreement but this exclusion cannot extend to fraudulent misrepresentations for reasons of public policy. The enforceability of such an exclusion clause will be subject to the test of reasonableness in the Unfair Contract Terms Act 1977); and
- It will specify that the only remedies available to the buyer are those of a contractual nature but subject to the terms of the agreement (which, in the context of an acquisition, include the usual seller protection provisions).
Entire agreement clauses will be subject to the various principles applying to contractual interpretation and each one will be considered on its own particular wording, but from a seller’s perspective, it should seek to negotiate a position where it is not making representations to the buyer and has no liability for those which it may have given.