Co-Written by Kirsten Houghton
The Topic
Contracts for the supply of computer hardware or software frequently incorporate entire agreement clauses. As a result of recent decisions in the courts1 these clauses are undoubtedly a topic of current interest. This article addresses the why, what, and worth of such clauses.
The Underlying Problem
The underlying problem is a recurrent one. By way of a hypothetical example, the systems designers and programmers of a software house customise one of their software products to comply with a description of functionality set out in a written contract entered into by someone in their sales department and a business customer. After the system is delivered the customer refuses to pay, complaining that additional functionality had been agreed with the sales department (either orally or in correspondence) or that the capabilities of the existing product had been misrepresented by that department. If the customer’s lawyers become involved they will characterise any pre-contract statements as collateral warranties or misrepresentations. Even if the statements relied upon (or their intended effect) are disputed, the financial risks of arbitration or litigation, or the need to maintain a good image in terms of customer service, or a combination of both, may, in the light of the size and value of the project, persuade the software house that it should opt for a compromise solution in which, for example, it enhances the system and the customer shoulders a small part of the additional cost. Nevertheless, in terms of profit, the project may have ceased to be of any value to the software house. In an endeavour to prevent a similar situation arising in the future, the software house consults its lawyers.
The Recommendation
The recommendation made to the software house is that it should include an entire agreement clause (linked with an exclusion clause in respect of misrepresentations) in all its future contracts. In fact this is the only potential solution available. Entire agreement clauses come in all shapes and sizes, and their precise effect in any particular case will depend upon the words used and the circumstances in which they are sought to be applied. However, a simple example might provide:-
"This Agreement contains the entire and only agreement between the parties and the parties acknowledge and agree that no representation has been made to, or relied upon by, either of them except as may be recorded herein."
The object of such a clause, to use the colourful language of Mr Justice Lightman in his judgment in Inntrepreneur Pub Co. v. East Crown Ltd.2 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) on which to found a claim … to the existence of a collateral warranty".
More immediately, the object of such clauses is to seek to overcome the effects of the erosion of the so-called parol evidence rule.
The Parol Evidence Rule
Obviously, problems of the nature described above are commonplace, and were experienced in numerous fields of commercial activity long before IT was even dreamed of. At one time these problems were mitigated in the courts by a strict appliance of the parol3 evidence rule. A formulation of the rule which was accepted by the House of Lords was in the following terms:-
"parol testimony cannot be received to contradict, vary, add to or subtract from the terms of a written contract, or the terms in which the parties have deliberately agreed to record any part of the contract."4
In spite of the term "parol" the rule applies to all material, whether oral or written, not recorded in the written contract5. The effect of this rule was mitigated by various exceptions. In the mid nineteenth century it was firmly established by the decision of the court in Harris v Reckett6 that the rule "only applies where the parties to an agreement reduce it to writing, and agree or intend that the writing shall be their agreement." As a result, there have been numerous cases in which evidence has been admitted to show that it was not the intention of the parties, objectively judged, to regulate their rights in relation to a particular transaction solely by reference to a written agreement between them, or in which the courts have found that in addition to the written agreement a collateral contract had been made or a collateral warranty had been given7. Such results are rationalised on the basis that "The parol agreement neither alters nor adds to the written one, but is an independent agreement."8 By way of example, in Couchman v Hill 9 oral statements made at a cattle sale by a vendor and auctioneer that a heifer was unserved were held to override written conditions that all lots must be taken subject to and were sold with "all faults, imperfections and errors of description", so that the Claimant was able to recover damages when, later, the heifer was found to be in calf and died as a result of carrying a calf, at too young an age. In further striking applications of this approach, landlords who had induced others to enter into leases on the strength of representations that covenants in the proposed leases would not be enforced were held to have entered into collateral contracts or warranties which overrode, and prevented them from enforcing, the covenants.10
Subsequent Developments
Seeking to capitalise on the dictum in Harris v Reckett (above) that the parol evidence rule will apply where the parties to an agreement reduce it to writing and agree that the writing shall be their agreement, legal draftsmen came up with the entire agreement clauses. The response of the court to these clauses initially tended not to be supportive. In Brikom Investments Limited v Carr11 the Court of Appeal held that an entire agreement clause did not have the effect of preventing a tenant from relying on the landlord’s oral assurances, given before entering into a lease, that repairing covenants in the proposed lease would not be strictly enforced, Lord Denning MR stating:
"All I need say about that clause is that it is of no avail to the landlords whatever. The cases are legion in which such a clause is of no effect in the face of an express promise or representation on which the other side has relied …"
Lord Denning did not give the names of his legion of cases, and the authority to which he did refer did not in fact involve an entire agreement clause. Nevertheless, similar treatment had been meted out to an entire agreement clause in the earlier decision of the Court of Appeal in Felstone Tile Company Ltd. v. Winget Ltd.12, and in subsequent decisions, including, in the IT field, the unreported decision of Mr Justice Steyn in Eurodynamics Systems Plc v. General Automation Ltd.13, such clauses have met with the same fate.
The efficacy of entire agreement clauses was further complicated by the enactment of the Unfair Contract Terms Act 1977 ("UCTA") which in some circumstances invalidates contract terms or notices which purport to exclude or restrict certain types of liability, including liability for negligence, unless the terms or notice comply with statutory requirements as to reasonableness. Similar provisions are applied by virtue of Section 3 of the Misrepresentation Act 1967 to misrepresentations inducing contracts.
However, in a number of recent cases entire agreement clauses have been held to be effective. In Deepak Fertilisers etc. v ICI14 the relevant clause provided that:-
"This contract comprises the entire agreement between the parties, as detailed in the various Articles and Annexures and there are not any agreements, understandings, promises or conditions, oral or written, expressed or implied, concerning the subject matter which are not merged into this contract and superseded hereby. This contract may be amended in the future only in writing executed by the parties."
The Court of Appeal held that this wording excluded any collateral warranty (but not any misrepresentations). Similarly, entire agreement clauses were upheld in Huber Investments v Private DIY Company15 and in Inntrepreneur Pub Co. v. East Crown Ltd16 In McGrath v Shah17 the view was expressed, in the context of a dispute concerning a contract for the sale of land, that an entire agreement clause was not affected by Section 3 of the Misrepresentation Act 1967 because that provision, which is in terms directed to the exclusion or restriction of liability for misrepresentation or of remedies arising by reason of misrepresentation, was not apt to cover "a contractual provision which seeks to define where the contractual terms are actually to be found", but that in any event the inclusion of such a clause in a contract of that nature was eminently fair and reasonable. Subsequently, in Grimstead and Son Ltd. v McGarrigan18, Chadwick L.J. expressed the view that the fact that the parties had had the advice of accountants and solicitors before entering into their contract rendered the terms of an entire agreement clause fair and reasonable. Similarly in Watford Electronics Ltd. v Sanderson CFL Ltd19. the Court of Appeal held that the inclusion in a contract of a term which, when read together with an entire agreement clause had the effect of excluding liability for pre-contract representations, was fair and reasonable, principally because its terms, including the price, had been negotiated between experienced businessmen representing substantial companies of equal bargaining power.
It should be noted, however, that whatever an entire agreement clause may achieve, it will not be enforced if it is a sham, as was the case in Oroleum Limited v Sigmoid Resources NV20, where a contract for the supply of crude oil provided that it would not be delivered to a boycotted country when in fact the true intention was that it would be. Nor can the clause prevent the parties from subsequently agreeing to vary the contract including it. Furthermore, it is also absolutely clear that pre-contract negotiations will only be affected by a contract term if the wording is aptly drafted. Thus a term which merely provides that the written contract constitutes "the entire agreement and understanding between the parties" will be ineffective to exclude liability for misrepresentations because it does not clearly so provide. Otherwise, the efficacy of entire agreement clauses is less straightforward and is discussed further below.
"Agreed" Facts
As can be seen, the clauses under discussion typically purport to record as a matter of fact that the agreement including them is the parties' entire agreement. Often these will be linked with a provision that "no representation has been made to or relied upon by either party etc.", or a provision in similar terms. Generally such provisions will not prevent one party adducing evidence that what has been recorded is not in fact true i.e. alleging that the written agreement does not reflect the entirety of what was agreed, or that there was a causative misrepresentation.
This, and an explanation of the ingredients of estoppel which work to the opposite effect, was explained by the Court of Appeal in Lowe v Lombank Ltd21. where a finance company sought to rely upon untrue statements in a hire-purchase agreement which the claimant (the plaintiff) had signed:
This curiously drafted clause was never brought to the notice of the plaintiff and its effect was not made clear to her…… It is expressed to be an acknowledgment, that is to say, a representation, by the plaintiff that she had not made known by implication that the car was required for a particular purpose, that is, as a means of transport and also an agreement that she had not made that purpose known to the defendants……To call it an agreement as well as an acknowledgment by the plaintiff cannot convert a statement as to past facts, known by both parties to be untrue, into a contractual obligation, which is essentially a promise by the promisor to the promisee that acts will be done in the future or that facts exist at the time of the promise or will exist in the future. To say that the hirer "agrees" that he has not done something in the past means no more than that the hirer, at the request of the owner, represents that he has not done that thing in the past. If intended by the hirer to be acted upon by the person to whom the representation is made, believed to be true by such person and acted upon by such person to his detriment, it can give rise to an estoppel: it cannot give rise to any positive contractual obligation. Although contained in the same document as the contract, it is not a contractual promise."22
Obviously, if an arbitrator or judge is satisfied that one party did make a particular pre-contract representation that party will not be able to establish that he believed a statement in the written contract that no such statement was made. The prospects of establishing an estoppel may be a little better where the statement in the written contract is to the effect that the other party "has not relied upon" any pre-contract representation that was made to him, though, again, the party may have an uphill battle, in evidential terms, if the court or arbitrator is satisfied that a pre-contract representation was actually made and was of a nature likely to act as an inducement to the representee to enter into the contract. However, as can be seen, generally, a term in the contract that certain matters are agreed to be facts, is unlikely to achieve much if the truth is shown to be different.
Genuine Intentions
It would be unfortunate if parties who genuinely intend that their rights in relation to a particular transaction should be governed exclusively by the terms of a written contract were unable to achieve that result. In fact there is nothing to prevent such parties entering into such an agreement, and if that is their clear intent it will be enforced on the basis that their agreement contains express or implied mutual promises not to assert any right other than one which arises under the terms of the written record of the agreement. When an entire agreement clause is effective to exclude reliance upon any pre-contractual statements not recorded in the agreement it is because, on its true construction, it contains such mutual promises. One view is that an appropriately worded entire agreement clause not only indicates, but also is decisive as to, the parties' firm intentions. This view was expressed by Mr. Justice Lightman in Inntrepreneur Pub Co. v. East Crown Ltd23 when he stated that
"…such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere and that, accordingly, any promises or assurances made in the course of the negotiations (which, in the absence of such a clause, might have effect as a collateral warranty) shall have no contractual force, save in so far as they are reflected and given effect in that document. The operation of the clause is not to render evidence of the collateral warranty inadmissible in evidence….. it is to denude what would otherwise constitute a collateral warranty of legal effect."
However, as has been seen, the opposite view in relation to a lease which incorporated an entire agreement clause was taken by the Court of Appeal in Brikom Investments v Carr24 where Lord Justice Roskill stated:
"When two parties are about to enter into an agreement for a lease – a lease which imposes upon the lessee a very burdensome obligation in respect to repairs – I can see no reason why one party cannot say to the other, "In relation to those outstanding matters, whatever may be our legal position under the terms of the lease, we will not as landlords enforce that obligation against you". I see no reason why effect should not be given to such a position. I think the evidence shows that that was the position here; there was a perfectly good collateral contract between these two parties."25
It would appear that Mr. Justice Lightman may not have been aware of this decision, or of the earlier decision of the Court of Appeal in Felstone Tile Company Ltd. v Winget Ltd26, since neither of these cases is referred to in his judgment.
The view of the Law Commission is that an entire agreement clause
"may have a strong persuasive effect but if it were proved that, notwithstanding the clause, the parties actually intended some additional term to be of contractual effect, the court would give effect to that term because such was the intention of the parties."27
In the opinion of the authors of this article the view of the Law Commission is to be preferred.
If it is correct, then a party who enters into a written contract including an entire agreement clause will have an evidential hurdle to overcome when he asserts that the contract does not in fact reflect the entire agreement between the parties, but he will be at liberty to adduce evidence to support his case. The decision of the court or arbitrator will depend upon the facts and circumstances in each case. In cases where the written terms have been subject to substantial negotiation or where lawyers have been involved in advising or in the drafting of the terms, it will be more difficult (and often impossible) to show that the parties did not intend their rights to be regulated exclusively by those terms. In other cases where, for example, the entire agreement clause is one of a set of standard terms which has not been subject to negotiation, the opposite may apply. It is also clear that in some kinds of transactions (e.g. the sale of land or shares, or, perhaps, substantial software development contracts) it will generally be more difficult to escape the consequences of entering into a contract incorporating an entire agreement clause. Nonetheless, the result in each case will turn upon its own facts.
If it is correct that an entire agreement clause will be ineffective where the parties actually intended some additional term to be of contractual effect neither party, in such circumstances, would need to resort to UCTA in order to be able to rely on that additional term. If, however, the clause were held to be effective, the situation would be different. The questions which would then arise would be, firstly, whether the provisions of UCTA would apply at all, and secondly whether it would be possible to satisfy the court or arbitrator that the clause was a fair and reasonable one to have included in the contract. The second question will not be considered in detail in this article, since it is one which cannot be answered in the abstract but only on the facts of each particular case and about which there is now considerable legal authority. So far as the first question is concerned, it has been argued28 that an entire agreement clause is not caught by Sections 2 or 3 of UCTA because those sections only apply to clauses which "exclude or restrict liability", and that an entire agreement clause has the effect that no liability arises because of the factual state of affairs which it records. This appears to be a somewhat circular argument which ought not to apply except in a case where it has first been established (without taking the clause itself into account) that the parties genuinely intended their rights to be governed exclusively by the terms of the written contract.
Further, as the author of the argument points out, in Cremdean Properties v. Nash, 29Bridge LJ indicated that, in his view, exclusion clauses which purported to deny the very existence of a representation did not avoid the effect of s.3 of the Misrepresentation Act 1967. Furthermore, the similar argument in relation to disclaimers and duties of care in the tort of negligence has been tacitly ruled out by House of Lords decisions such as Smith v. Bush30 and Henderson v. Merrett Syndicates Ltd31. where it was stated the existence of a duty of care is to be ascertained without regard to any disclaimer of responsibility and that the reasonableness of the disclaimer for the purposes of UCTA is to be considered later.
For the same reasons one can question the suggestion, made in McGrath v Shah,32 that section 3 of the Misrepresentation Act 1967 would not apply to entire agreement clauses.
Conclusion
The following conclusions may be drawn:-
- The effect of an entire agreement clause will be that the party who has entered into an agreement containing such a clause and who wishes to circumvent it will have an evidential difficulty in showing that the clause is untrue, but being only an evidential difficulty he may well be able to surmount it.
- Entire agreement clauses, whether or not linked with exclusions of pre-contract representations, may fall within the scope of UCTA or the equivalent provisions of the Misrepresentation Act 1967.
- Such clauses, therefore, are not a complete panacea for problems of the nature experienced by the software house as described at the beginning of this article.
- Nevertheless, if the clause forms part of genuine negotiations it could well be effective as delimiting the scope of the material which is to regulate the rights of the parties, or its inclusion in the contract may be regarded as fair and reasonable and thus as complying with the statutory requirements of UCTA and the Misrepresentation Act 1967.
- In any event, a party to a contract who is entirely satisfied that it does not wish to rely upon anything said or written during pre-contract negotiations is unlikely to have anything to lose by seeking to include such a clause in a written contract, provided that party remains aware that such clauses are not necessarily foolproof.
Footnotes
1
e.g. Inntrepreneur Pub Co. v East Crown Ltd [2000] 41 E.G. 209. Watford Electronics Ltd. v. Sanderson CFL Ltd. [2001] EWCA CIV 317 (reviewed elsewhere in this Issue).2
See Note 1.3
i.e. "oral".4
Bank of Australasia v Palmer [1897] AC 540 @ 545 per Lord Morris.5
See Chitty on Contracts 28th ed. vol.1 paragraph 12-095.6
Harris v Reckett (1859) 4 H and N.I @ 7 per Pollock CB7
This is not however permissible where by law a contract is required to be in writing e.g. a contract for the disposition of an interest in land.8
Mann v Nunn (1874) 30 L.T. 526, 5279
Couchman v Hill [1947] 1 KB 554.10
City of Westminster Properties (1934) Ltd v. Mudd [1959] Ch.129: Brikom Investments Limited v. Carr [1979] 1 QB 467: International Press Centre Limited v. Norwich Union [1986] 36 BLR 130.11
[1979] 1 QB 46712
[1936] 3 All ER 47313
Unreported, QBD, 6 September 1988. In spite of an entire agreement clause it was held that there was a collateral contract based on oral representations that the systems which were also to be purchased from the defendants would have a spooler and a multi-tracking facility and that the claimants would be provided with a screen formatting program.14
[1999] 1 LL.Rep. 38715
Unreported, Ch.D. 16 June 199516
Above.17
(1989) 57 P&CR 45118
Unreported, CA, 27 October 1999.19
Above.20
Unreported, QBD, 29 January 199121
[1960] 1 WLR 196.22
See Diplock J @ 204. See also Thomas Witter Ltd. v TJP Industries Ltd. [1996] 2 All ER 573 and the cases cited at notes 1 and 17 above.23
See note 1 above.24
See note 10 above.25
See page 488 E to F.26
See note 12 above.27
Law.Com. 154 Cmnd. 9700 (1976) para. 2.15.28
Knight, The Acquisition of Private Companies (6th ed) at 123.29
[1977] 244 EG 547.30
[1990] 1 AC 831.31
[1995] 2 AC 40532
Above.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.
