"This contract shall constitute the entire agreement between the parties with respect to the subject matter hereof and shall not include any representation, promise or warranty other than those set out herein."
The purpose of these clauses, known as "entire agreement" clauses, which are often found in commercial contracts, is to prevent the parties who entered into a final contract from invoking prior discussions or understandings to give a different meaning to its provisions. The reasoning underlying such a clause is simple: because the contract is supposed to reflect the final agreement between the parties as to their rights and obligations and, accordingly, their true intent, it would be dangerous to allow them to go back to discussions or understandings that preceded the contract. Such clauses basically aim to preserve the stability of contracts.
The courts have generally upheld such clauses and excluded evidence relating to verbal or written understandings that preceded the signature of the final contract. However, the Superior Court, in the case of IHAG-Holding AG v. Intrawest Corporation, put aside the "entire agreement" clause included in the final agreement to consider a prior letter of intent in order to determine the method to be used to calculate the purchase price.
The facts of the case may be summarized as follows: a letter of intent, which did not bind the parties, stipulated an elaborate formula for the calculation of the purchase price of a sports complex located in the Gatineau region. The final agreement signed by the parties reproduced this same formula but with a drafting mistake that had the effect of increasing the purchase price by $6.2 million relative to the amount that would have been obtained if the formula set out in the letter of intent had been correctly reproduced.
The Superior Court decided to set aside the formula for calculating the purchase price in the final contract signed by the parties and instead applied the formula set out in the letter of intent, which did not bind the parties. The Court concluded that it was justifiable to set aside the "entire agreement" clause and return to a prior understanding when it was obvious that one party was trying to rely on that clause in order to take advantage of a mistake. In fact, the drafting error, which both parties were unaware of until then, was only discovered at the time of paying the "earnout payment" element of the price. The seller had then tried to apply the "entire agreement" clause that allowed it to set aside the less favourable formula contained in the letter of intent. However, the application of an "entire agreement" clause cannot have the effect of setting aside each party's obligation to act in good faith.
As for the letter of intent, although it did not bind the parties, the Court concluded that it could be applied since it truly represented their real agreement respecting the formula for determining the purchase price.
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