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Please note that this article is based upon an analysis of English case law.

During a sales pitch or the negotiation of a contract, many things are written or said to clinch the deal. No doubt, on occasions, you might experience some enthusiastic ‘overselling’ or ‘marketing hype’ -- statements that the facts cannot always justify.

Sometimes negotiators represent ideas in unspecific and uncertain terms. For that reason, those drafting contracts for the sellers seek to develop entire agreement clauses to ensure that the signed written contract is the definitive and exclusive document of record that accurately reflects the deal finally reached between the parties.

Entire agreement clauses are designed to protect the seller and provide a degree of certainty for both parties and their advisors. But these clauses often provide little or no protection as English case law has shown.  

In response to this challenge, this article…

  • explains the limitations of these clauses;
  • shows how suppliers can maximize protection; and
  • demonstrates what customers need to know when faced with such clauses.  

As one judge very descriptively put it in 2010: “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)…a statement 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 which may arise in its absence to conduct such a search.”

The 2018 Court of Appeal case of Hipwell v Szurek1 asserted that “English law would ordinarily [give entire agreement clauses] full force and conclusive effect as an integral part of the parties' bargain” but a review of case law over many years clearly demonstrates that the degree of protection these clauses provide may be largely illusory.

Such clauses have long been the subject of microscopic judicial scrutiny with judges often demonstrating significant ingenuity to circumvent the clauses whenever they consider it justified to do so.

Before looking at the most recent cases, a decision from 2010 is perhaps the best and highest profile example of a court finding a way to provide a customer with a pathway for claiming millions in damages on the basis of various misrepresentations -- notwithstanding a contractual entire agreement clause.

In the case of BSkyB v HP Enterprise Services 2, the supplier was alleged to have made both fraudulent and negligent misrepresentations during the process leading to contracts being executed. A fraudulent misrepresentation means knowing it is untrue or being reckless as to whether it is true or not. A representation is negligent if it is made carelessly or without reasonable grounds for believing it to be true.

As part of their defense, the supplier cited the contractual entire agreement clause. The clause in question expressly acknowledged that it did not provide protection in respect of fraudulent misrepresentation. That is simply a reflection of the general law. It is well established that liability for fraudulent misrepresentation cannot be limited or excluded by contract.

Nevertheless, the supplier argued that the clause prevented BSkyB from making claims on the basis of the alleged negligent misrepresentations. Although the clause expressly stated that the contract “superseded any previous discussions, correspondence [and] representations between the parties…” the judge held that the wording was insufficiently clear to exclude non-contractual liability for negligent pre-contract misrepresentations.

Moving the clock forward to 2019, we should remind suppliers to take great care with any pre-contractual statements because such clauses are increasingly seen as providing little or no protection.

The Al-Hasawi v Nottingham Forest case3 decided only last year involved the sale of the famous football club that won the European Cup in the late 70s / early 80s. The sale agreement contained a clause in very similar terms to the BSkyB case. The clause said that the written agreement “extinguished all previous discussions, correspondence [and] representations” between the parties. The judge, very much echoing the judgment in the BSkyB case, expressed the view that clear words are needed to exclude non-contractual misrepresentation claims and an entire agreement clause that simply sets out the scope of the agreement is not sufficient. Parties must go further and include "clear wording establishing an intention to go beyond defining the scope of the contractual agreement.” In the judge’s view, it must be made clear that claims cannot be brought on any, alternative, non-contractual basis. Apparently, it is insufficient to simply claim that a representation has been ‘extinguished.’

The second important case from 2018 on this topic was the case of First Tower Trustees v CDS Superstores.4 In this case relating to the grant of a lease, the drafting of the contract included a so called ‘declaration of non-reliance’ in the following terms “Tenant acknowledges that this lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the landlord." This wording, in addition to fairly standard entire agreement language, was upheld by the court as being effective to exclude liability for misrepresentation. However, the court was then asked to consider whether the clause was legally enforceable.

Under section 3(1) of the Misrepresentation Act 1967,5 if a contract contains a term which would exclude or restrict liability for misrepresentation or any remedy in respect of such a misrepresentation, that term must satisfy a test of ‘reasonableness’. The statute also provides that the burden of proving that the clause satisfies the test is on the party claiming that it does. Based on the facts, the clause was held to be unreasonable and therefore the landlord could not rely upon it. The judge said, “Although there might be a case where, on exceptional facts, a clause which precludes reliance on replies to inquiries might be held to satisfy the test of reasonableness, I find it very hard to imagine what those facts might be.”

The final case on this topic decided in 2018 involved a slightly different question. In Hipwell v Szurek6 the Court of Appeal was asked to decide whether a contractual obligation should be implied into the contract under consideration. The contract in question included an entire agreement clause which contained both the typical ‘this agreement constitutes the entire agreement and supersedes any previous agreement’ language as well as a declaration of non-reliance. One might have thought that an entire agreement clause meant exactly that. However, the court emphasized that it is well established that a contract term may be implied where it is necessary to give business efficacy to the contract in question. The test is one of necessity in order to give the contract ‘commercial coherence’ (so as to make the contract work). It is not a question of whether the implied term is reasonable. In this particular case, the entire agreement was, most certainly, nothing of the sort!

So how might we respond to this?

For suppliers

  • Continue to include entire agreement clauses in contracts because, despite their limitations, they may still provide useful arguments which can be used to defend claims and encourage settlements on favorable terms.
  • Do not assume that an entire agreement clause will necessarily protect you as a supplier. Ensure that all pre-contract statements and bid documents are carefully scrutinized to ensure that they are accurate, not misleading, have been properly thought through and can be justified if necessary. It is far preferable to avoid anything which could constitute a misrepresentation in the first place.
  • Ensure that the clause is worded carefully in line with the latest legal thinking.
  • Be aware that additional obligations may still be implied despite the existence of an entire agreement clause where it is considered necessary to give the contract ‘business efficacy’.

For customers (buyers)

  • Do not assume that your claim will necessarily be excluded by an entire agreement type clause.
  • Consider whether important representations upon which you want to rely should be expressly incorporated into any written contract.
  • Assess carefully whether any potential misrepresentation is potentially fraudulent or reckless, because that may have crucial implications for recoverable losses.
  • Consider whether you have grounds for arguing that it is necessary for a favorable contract term to be implied.  

 

REFERENCES

  1. 2018 Court of Appeal case of Hipwell v Szurek
  2. BSkyB v HP Enterprise Services
  3. Al-Hasawi v Nottingham Forest case
  4. First Tower Trustees LTD vs CDS (Superstores International) LTD (2018)
  5. Misrepresentation Act 1967
  6. Hipwell vs Szurek  

 

ABOUT THE AUTHOR

Paul Golding is an English solicitor specializing in advising upon the drafting, negotiation, and interpretation of commercial contracts. He founded the firm TRG law in 2004 (http://www.trglaw.com).  He is a regular speaker on commercial legal topics and has organized the annual IACCM English contract law update session (next event is on 7th March; see https://www.iaccm.com/events/) for many years.  His analysis of case law developments over more than 20 years now means that TRG has an archive of case law reports on topics relevant to commercial contracts numbering more than 400 reported cases.

Topics: contract management, communication

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