Australia: Entire agreement clauses in construction contracts - Implied terms and misrepresentations

Last Updated: 18 January 2012
Article by Geoff Standen

In brief - Entire agreement clause not intended as an exclusionary provision

The rationale underlying entire agreement clauses is to consolidate the bargain of the parties. It is not to act as an exclusionary provision carving out things such as misrepresentations and implied terms.

Purpose of entire agreement clause

"Entire agreement" clauses are invariably included in construction contracts. Their purpose, colourfully highlighted in a 2000 English decision (Inntrepreneur Pub Co v East Crown Limited [2000] 2 Lloyd's Rep 611 at 614), is to prevent a party "threshing 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 to the existence of a collateral warranty".

Entire agreement clauses are intended to "consolidate" the overall bargain into one document. They remove the need to prove an intention to merge the transaction into documentary form.

Philosophically, the effectiveness of such clauses derives from the agreement of the parties. The essence of the agreement is not to proffer an express contractual term not set out in the agreement. To do so would be a breach of contract.

Scope of entire agreement clauses

Determining the scope of an entire agreement clause is dependent upon the intention of the parties interpreted in the light of the contract. In a 2011 English decision (AXA Sunlife Services Plc v Campbell Martin Ltd & Ors), that issue raised interesting questions as to whether such a clause extended to misrepresentations and implied terms.

AXA commenced an action against four of its representatives, all of whom had entered into standard form contracts supplied by AXA. AXA alleged that the contracts had been terminated and that, as a result, monies were owing to AXA by each of the defendants. The defendants' defences relied, amongst other things, on fraudulent misrepresentations inducing them to enter into the agreement and on alleged breach of certain implied terms.

Clause 24 of the agreements provided as follows:

"(i) This Agreement and the Schedules and documents referred to herein constitute the entire agreement and understanding between you and us in relation to the subject matter thereof. (ii) Without prejudice to any variation as provided in clause 1.1, (iii) this Agreement shall supersede any prior promises, agreements, representations, undertakings or implications whether made orally or in writing between you and us relating to the subject matter of this Agreement. (iv) but this will not affect any obligations in any such prior agreement which are expressed to continue after termination."

The references to parts (i) to (iv) in that quote have been inserted to illustrate the way in which Lord Justice Rix analysed the clause.

Exclusion of liability for misrepresentation must be clearly stated

After noting that parts (i), (ii) and (iv) were all concerned with identifying the parties' contractual arrangements, the court turned its attention to AXA's submission that part (iii) excluded liability for misrepresentation. That argument received short shrift, with his Honour making the following pointed comments:

"I would be inclined, subject to authority, to regard clause 24 as being concerned only with matters of agreement, and not with misrepresentation at all. 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, have been relied on by the representee in entering into their agreement, and which may give the representee rights to rescind that agreement and/or claim tortious or quasi-tortious damages by reason of loss arising out of entering into the agreement. In a clause therefore in which three parts are plainly concerned only with agreement, including two other parts of the self-same sentence, and in which all the other sibling words in the critical part (iii) are words of agreement, and where the critical single word "representations" (not misrepresentations) is likely in context to refer to representations which might be argued, but for the clause, to have become terms of the agreement, and where the other important word "supersede" is essentially a word of agreement rather than exclusion, I would thus provisionally conclude that misrepresentation and the exclusion of misrepresentation or liability for it are simply not the business of the clause at all."

The court's inclination was confirmed by a review of relevant jurisprudence, which resulted in Lord Justice Rix identifying certain themes which deserved recognition:

"Among them is that the exclusion of liability for misrepresentation has to be clearly stated. It can be done by clauses which state the parties' agreement that there have been no representations made; or that there has been no reliance on any representation; or by an express exclusion of liability for misrepresentation. However, save in such contexts, and particularly where the word "representations" takes its place alongside other words expressive of contractual obligation, talk of the parties' contract superseding such prior agreement will not by itself absolve a party of misrepresentation where its ingredients can be proved."

On this basis, clause 24 was found not to exclude liability for misrepresentations of any kind.

Some implied terms not excluded by entire agreement clauses

Insofar as the defendants sought to rely on implied terms, they argued that they were necessary to give business efficacy to the agreements. The court regarded such terms as "intrinsic" to the agreements and not excluded by clause 24. Such terms fell within part (i) of the clause and were not "prior" to the agreement. On the other hand, terms which might be implied as a result of matters "extrinsic" to the agreements would be excluded by clause 24.

This approach is consistent with Australian authority. For example, in a 1999 Victorian Court of Appeal decision, a clause which stated that the contract was the "sole repository of the agreement" and that there were "no terms . . . which have been relied upon by the Purchaser in entering into this contract other than those included in this contract" was held not to exclude the implication of a term which otherwise ought to be implied.

Interestingly, the court in AXA acknowledged the possibility that clause 24 could have expressly excluded terms which otherwise would have been "intrinsic". It would not normally be prudent, however, to adopt this course. To do so may unnecessarily restrict the commerciality of the contract.

Furthermore, it would require the parties to make a largely uninformed election at the date of the contract regarding risk/benefit in connection with the term which may arise in unanticipated circumstances.

Challenging entire agreement clauses

The AXA decision illustrates the point that entire agreement clauses may well not be conclusive. In addition to the possibility of challenging the integrative effect of such clauses by alleging misrepresentation, there may be other reasons why such clauses may be invalid.

For instance, they may seek to exclude terms implied by statute, resulting in the invalidity of the clause (at least to that extent). Similarly, that result could flow if the clause was intended to exclude liability for misleading or deceptive conduct within the meaning of section 18 of schedule 2 to the Competition & Consumer Act 2010 (formerly section 52 of the Trade Practices Act 1974).

Commercial purpose and practical implications of entire agreement clauses

The rationale underlying entire agreement clauses is to consolidate the bargain of the parties. It is not to act as an exclusionary provision carving out things such as misrepresentations and implied terms.

Conceptually, those matters should be dealt with in separate clauses. From a practical perspective, this approach would go a long way to preserving the integrity of the entire agreement clause.

Entire agreement clauses are valuable in commercial contracts. The concept of "entire agreement" is not, however, a term of art. The meaning of such clauses is, as with all other terms, a matter of interpretation. In drafting such clauses:

  • their terms should be confined to their fundamental conceptual purpose
  • the language of exclusion should be avoided
  • those things which the parties intend to exclude from their risk profile (eg liability for misrepresentations) should be dealt with in separate contractual provisions.

For more information about construction and engineering, major projects, infrastructure and risk, please see the website of CBP Lawyers or contact Geoff Standen at gps@cbp.com.au

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Geoff Standen
 
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