This article aims to provide guidance in relation to the implementation of an Entire Agreement clause when negotiating a contract, and outline what must always be taken into consideration in order to effectively incorporate this type of clauses into a contractual agreement.
The purpose of incorporating an entire agreement clause into a contract
The purpose of incorporating an Entire Agreement clause into a contract is to exclude liability for any statements or representations (including pre-contractual) other than those expressly set out in the written contract between the contracting parties. This clause is a very important provision, especially in relation to the most common form of judicial dispute, the litigation proceedings.
A court in a judicial dispute will scrutinise the precise wording of an Entire Agreement clause in order to understand its effect and meaning. If it is not clear, the court will seek to infer the contracting parties' intentions. Subsequently, contracting parties shall therefore pay great attention when drafting an Entire Agreement clause in order to ensure that this clause is effective.
Excluding implied terms
The proper incorporation of an effective Entire Agreement clause can potentially exclude implied terms. Courts will always consider the type of terms being implied into a contractual relationship. For example, an Entire Agreement clause may be binding and effectively exclude the inclusion of any implied terms which are based on the previous course of dealing in a commercial contract. It must be noted however, that where, for example, the implied term is one which is essential for reasons of business efficacy, such an implied term can prevail over an Entire Agreement clause on the basis that the implied term arguably existed in the contract from the outset.
Practical points to consider when drafting an entire agreement clause
- When the contracting parties have a longstanding commercial relationship or historic dealings which are intended to determine matters under a contractual agreement, the Entire Agreement clause shall be appropriately limited. Express wording must be used to include a previous course of dealing. In addition to the above, given the uncertain tests that must be satisfied before a court will actually imply terms based on historic dealings between the contracting parties, it is advisable not to rely on terms being implied into the contract.
- Clear and unambiguous wording must always be used to prevent the inclusion of implied terms.
The effect of an Entire Agreement clause against a misrepresentation claim
An entire agreement clause will not be effective on its own to prevent a claim that a contracting party entered into a contract in reliance on a misrepresentation. A good example is a contractual clause which simply states that "the agreement constitutes the entire agreement between the parties and supersedes all previous statements". This wording alone in an Entire Agreement clause would not exclude claims for pre-contractual misrepresentation because the statement does not expressly say it will.
An Entire Agreement clause that did not expressly and unambiguously exclude remedies for pre-contractual misrepresentations and which failed to distinguish between liabilities for different types of misrepresentation was held in the past to be ineffective.
To ensure that an entire agreement clause effectively excludes liability for pre-contractual misrepresentation, in addition to the entire agreement statement, contractual parties must always consider including the following:
- A statement of non-reliance, which provides an acknowledgement that, for example in a commercial contract the buyer is not relying on any representations or warranties other than those contained in the contract. If drafted properly, a non-reliance clause will seek to minimize the risk of misrepresentation claims. However, in order to be effective, a non-reliance clause must also satisfy certain pre-conditions. This is because non-reliance clause seeks to restrict liability for misrepresentation. In accordance with the case of Kypio (ITH) Company v Ioannis Kassapi and Another (1980) 2 JSC 259, an exclusion or limitation clause cannot be enforced if it is either unreasonable per se or unreasonable in the specific circumstances of the case.
- In order for a contracting party to be able to rely on a non-reliance clause, it must be demonstrated that the statement of non-reliance was clear, the innocent party believed there had been no reliance on the representations in issue and the maker of the statement intended that it be relied upon.
- An express statement in respect of fraudulent misrepresentation so as to ensure the clause is fair, reasonable and effective.
In addition to the above, contracting parties who wish to effectively incorporate an Entire Agreement clause in a contract, may also need to include provisions for excluding implied conditions and warranties and ensure it works consistently with the liability provisions. For high value (and therefore high risk) commercial contracts, parties must also consider the following practical safeguards:
- Sellers shall review the Entire Agreement clauses so as to ensure that the clause is clear and effective to exclude liability for misrepresentation.
- Must include express wording to exclude liability for non-fraudulent misrepresentations and at the same time ensuring that the Entire Agreement clause does not purport to exclude liability for fraud (fraudulent misrepresentation).
- Must ensure that all the documents that contain the agreed terms are indeed incorporated into the Entire Agreement clause.
- Must always consider the use of an Entire Agreement clause in conjunction with a limitation/exclusion clause so that if the Entire Agreement clause is held to be ineffective and liability does actually arise, it will at least be restricted.
- Must ensure that key statements or representations being relied upon are expressly included in the contract as warranties.
- Must always ensure that pre-contractual statements are correct before the agreement is entered into.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought on your specific circumstances. For further information, please contact Stavros Ioannou.