Entire agreement clauses: handle with care

Entire agreement clauses are a standard feature in boilerplate contracts. They have been the subject of much litigation and detailed judicial analysis. As such, a standard approach to drafting these clauses has emerged. 

However, when interpreting these clauses, the courts will not analyse the clause in isolation – the usual rules of interpretation will apply. As recent cases illustrate, guidance from case law will be helpful, but the courts will interpret the clause within the broader context of the contractual bargain reached. 

Here we look at recent decisions on entire agreement clauses and analyse the practical implications.

Background

The purpose of an entire agreement clause is to make clear that the document in which it appears (and any other documents specified) constitute the whole agreement between the parties. This helps ensure contractual certainty: the parties know that the agreement is confined to the four corners of the document. It can also limit a party's liability for misrepresentation (loss caused by statements made before the contract was concluded) and other potential claims. 

The general approach of the courts has been to construe entire agreement clauses strictly, in the same way as they do exclusion clauses. As confirmed by the Court of Appeal in AXA Sun Life Services Plc v Campbell Martin Ltd and Others, if a party wants to effectively exclude liability for some representation or other, a clear statement to that effect will be required.  

Consequently, a standard approach to drafting these clauses has emerged, with contracting parties using well-established formulations in their boilerplate provisions. Typically, an entire agreement provision comprises several parts, which will include one or more of the following:

• An entire agreement statement declaring that the document in which it appears, and any documents referred to, contain the totality of the parties' bargain. 
• A non-reliance clause acknowledging that the parties have not relied on any representations, statements or claims in entering into the contract.
• An express exclusion of liability stating that a party is not to be held liable for any or all damage of particular types arising from particular actions, such as negligence or misrepresentations.
• A restriction of remedies limiting a party's remedies for misrepresentations to contractual remedies only.
• No exclusion for fraud confirming that the clause does not exclude liability for fraud.

However, and as confirmed by the Supreme Court in Wood v Capita (see our briefing), contractual provisions cannot be interpreted in isolation. The court will consider the clause in the context of the agreement as a whole. Boilerplate clauses are no exception to this rule.

Scope of an entire agreement clause: lack of express reference to misrepresentation not fatal

In NF Football Investments Ltd v NFCC Group Holdings Limited the High Court found that the entire agreement clause, when interpreted in the context of the contract as a whole, did prevent a claim for damages for misrepresentation notwithstanding the absence of an express exclusion to that effect. 

Facts

Under a sale and purchase agreement (SPA), two buyers purchased all the shares in Nottingham Forest Football Club (the Club). The SPA included an entire agreement clause as follows:

"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 buyers brought a claim for misrepresentation on the basis that the liabilities of the Club were falsely stated in the pre-contractual documentation. The buyers claimed to have relied on these statements in entering into the SPA.  

The seller denied the claim and, as part of its argument, relied on the entire agreement clause. That clause, when construed in the context of the agreement as a whole (and in particular, the contractual procedure agreed for dealing with any misrepresentations as to the extent of the Club's liabilities), excluded any statutory misrepresentation claim.

The buyer, relying on AXA Sun Life, argued the opposite. Claims for misrepresentation were not expressly excluded by the clause. As such, the clause excluded only representations of a contractual nature made prior to the SPA's execution. 

The decision

The Court agreed with the seller. As acknowledged in Axa Sun Life, that decision is only authority for the construction of the particular entire agreement clause in issue. In addition, the construction of a particular clause must be determined in the context of the agreement as a whole.  

On these facts, the Court concluded that the parties had intended the entire agreement clause to cover claims in misrepresentation. In particular:

• The parties had expressly set out contractual procedures to deal with misrepresentation claims likely to arise under the agreement. This procedure provided a complete contractual indemnity for losses incurred by reason of any misstatement of the Club's liabilities.
• The entire agreement clause was drafted with wide language. The clause included both terms of a contractual nature (such as "agreement", "promises" and "warranties") and terms not necessarily contractual in nature (such as "correspondence", "negotiations" and "representations").  Therefore the exclusion for "representations" did not relate exclusively to matters of a contractual nature.  

Practical implications

Although this was the decision of a Master on a summary judgment application, it highlights the dangers of adopting a rigid approach to the interpretation of standard boilerplate clauses. As with any other clause, they will always be interpreted in the context of the contract as a whole.

That said, at the drafting stage it is risky to rely on the court taking a more holistic view in interpreting standard boilerplate provisions (as highlighted by the fact that the decision was overturned on appeal in November 2018). Better to include the standard misrepresentation exclusion and avoid any satellite litigation.

Entire agreement clauses will not prevent terms from being implied into a contract

Hipwell v Szurek concerned the tenancy of cafe premises. The tenant encountered problems due to alleged unsafe electrical wiring. 

The tenant claimed that she was entitled to rescind the lease. She argued, among other things, that the landlord was in repudiatory breach of an implied term that made it responsible for the maintenance and repair of the electrical installations.  

The landlord denied liability, and relied on the entire agreement clause and non-reliance clause in the lease. These provided that the lease "constitutes the entire agreement and understanding of the parties relating to the transaction contemplated by the grant of this Lease and supersedes any previous agreement between the parties relating to the transaction", and that the tenant in entering into the lease is "not relying on, and shall have no remedy in respect of, any statement or representation made by or on behalf of the Landlord".

Decision

The Court considered that there was a "plain and obvious gap" in the lease. Other than a landlord's insurance covenant, the lease provided no express provision for the exterior of the premises or its electrical supply. The electricity supply did not fall within the tenant's obligation to keep "fixtures and fittings" in good repair and decorative order. Furthermore, the lease provided for the landlord's entry into the premises to repair, maintain, or renew service media, including the means by which gas and electricity were conveyed to the premises. 

As such, the Court of Appeal found that it was necessary to plug the gap and imply a covenant on the part of the landlord to the effect that the electrical installation and other service media provided was safely installed and covered by any requisite certificate. Furthermore, the implication of this term was not precluded by the entire agreement clause.

Practical implications

Gaps in the drafting are always best avoided. Where there are gaps, an entire agreement will not prevent the courts from filling them.

Non-reliance clauses and the reasonableness test

It has long been debated as to whether a non-reliance statement is an exclusion of liability for misrepresentation and, as such, subject to the reasonableness test under section 3 of the Misrepresentation Act (section 3). This debate was resolved in 2010 with the Court of Appeal's decision in Springwell. It is now clear that non-reliance statements can be an exclusion clause: if the clause is one that excludes liability for misrepresentation rather than defines the terms on which the parties are conducting their business, section 3 will apply. 

However, applying that test in practice has proven difficult and the approach in subsequent cases has given rise to uncertainty. The Court of Appeal decision in First Tower Trustees Ltd v CDS (Superstores International) Limited resolves that uncertainty. 

Facts

The tenant leased warehouse bays that were contaminated with asbestos. This fact was known to the landlord or their agents, but falsely misrepresented to the tenant in pre-contract replies to enquiries. The lease contained a non-reliance provision to the effect that:

"The 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."

Decision

The Court of Appeal upheld the first instance decision, and confirmed that the non-reliance clause was an exclusion clause subject to section 3. The approach the Court took was very simple: would the landlord have incurred liability for misrepresentation under the Misrepresentation Act but for the clause? The answer was yes. On its face, therefore, the clause operated to exclude liability, and there was no evidence to suggest otherwise. 

The fact that the clause operated as a contractual estoppel (which prevents the tenant from asserting that a representation was made because the tenant had agreed that nothing said by the landlord was to be regarded as a representation) made no difference. Section 3 still applied.

The reasonableness test therefore applied. The landlord had argued that the clause was reasonable on the basis that the parties were legally represented, of equal bargaining power, and the parties were not contracting on the landlord's standard terms. The trial judge accepted these facts but did not consider them conclusive. In deciding that the clause was unreasonable the trial judge acknowledged the importance of pre-contractual enquiries in the field of conveyancing; if the landlord was entitled to exclude liability for those representations, the important function of the replies to the pre-contract enquiries would become worthless. The Court of Appeal upheld his decision.

Practical implications

The Court's analysis of the application of section 3 and the fact that contractual estoppel is no answer to the question of whether it applies is of particular interest.

As recognised by the Court, if the fact that the clause gave rise to a contractual estoppel prevented section 3 from applying, that would mean that contracting parties could, subject to other applicable laws, make non-fraudulent misrepresentations of this type with impunity. Those drafting the Misrepresentation Act did not intend contracting parties to get round section 3 through such clever drafting. In adding his comments to that of Lewison LJ, Leggatt LJ was prepared to go further, stating: 

"I would hold that whenever a contracting party relies on the principle of contractual estoppel to argue that, by reason of a contract term, the other party to the contract is prevented from asserting a fact which is necessary to establish liability for a pre-contractual misrepresentation, the term falls within section 3 of the Misrepresentation Act 1967. Such a term is therefore of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11 of UCTA." 

Contracting parties therefore need to be aware that in drafting any clause that would give rise to a contractual estoppel, it will only be enforced if it satisfies the UCTA reasonableness test. 

Interpretation of boiler plate provisions: context is key

As these cases illustrate, judicial analysis on boilerplate clauses will only ever offer guidance as to their meaning: contractual context will always be key. 

This approach towards interpretation is not confined to entire agreement clauses. As acknowledged by the Court of Appeal in Goodlife Foods Limited v Hall Fire Protection Limited, there is a broader trend of courts upholding terms freely agreed between the parties in light of the factual and contractual context. 

That case concerned liability for a factory fire. The contractor responsible for designing and installing the fire safety system denied liability on the basis of a very broadly worded limitation clause in its standard terms and conditions which read as follows:

"We exclude all liability, loss, damages or expense consequential or otherwise caused to your property, goods, persons or the like, directly or indirectly resulting from our negligence or delay or failure or malfunction of the systems or components provided by HFS for whatever reason.

In the case of faulty components, we include only for the replacement, free of charge, of those defected parts.

As an alternative to our basic tender, we can provide insurance to cover the above risks. Please ask for the extra cost of the provision of this cover if required."

The Court of Appeal held that the contractor was entitled to rely on the exclusion clause. In considering the reasonableness of the clause, the Court accepted that the clause was broadly worded but, when viewed in the context of the agreement as a whole, was reasonable. In particular, the Court referred to the insurance arrangements and the fact that the contractor had offered, at an extra cost, to accept responsibility for this insurance. As such, the clause represented a "perfectly sensible allocation of the risk of loss and damage as between two commercial concerns of broadly equal size and bargaining power….".

Authors: Tom Cummins, Lianne Sneddon and Abigail Harvey

Cases referred to:

AXA Sun Life Services Plc v Campbell Martin Ltd [2011] EWCA Civ 133
Wood v Capita Insurance Services Limited [2017] UKSC 24
NF Football Investments Ltd and another v NFCC Group Holdings Ltd and another [2018] EWHC 1346 (Ch)
Hipwell v Szurek [2018] EWCA Civ 674
First Tower Trustees Ltd and another v CDS (Superstores International) Limited [2018] EWCA Civ 1396 
Springwell Navigation Corp v JP Morgan Chase Bank [2010] EWCA 1221
Goodlife Foods Limited v Hall Fire Protection Limited [2018] EWCA Civ 1371